- Freeze on new service apartment projects in Johor. The local dailies reported that the Johor government is postponing approvals of new serviced apartments in Johor. The stance taken is to curb oversupply issues, following a rising glut of high-rise units within the state. To be sure, The Star had reported last December that ~86,000 units of served apartments had been approved within the Iskandar Malaysia region until 2025. But, only about 26,000 units are required under the Iskandar Malaysia Development Plan 2006-2025. In mitigation, these planned developments are likely to be staggered with only ~10% to be under construction, we believe. State-wide, the total number of housing stocks in Johor reached 719,421 units in 2014. Last year, 11,459 units were launched in the Johor primary market (+27% YoY), with serviced apartments forming a bulk (3,995 units or c.35%). While total transaction volumes of residential units rose 18% YoY to 30,123 units, 4Q14 sales dropped by a third QoQ.

- Market weakness likely to persist… The latest development reaffirms our earlier view of further headwinds for the Johor market in the coming months, particularly in the high-rise segment. The residential overhang in Johor remained largely unchanged. However, unsold units that are under construction surged to 16,839 (+43%) in 2014, while those that are yet to be constructed jumped 96% YoY (to 6,208). Hence, the expected delivery of units launched over the last two to three years would likely add to existing housing stock in Johor in the absence of stronger demand or job creation. Sentiments are not helped by the recent news of a delay in the completion of the proposed KL-Singapore High Speed Rail link beyond its initial target of 2020.

- …amid more supply pressure from Chinese developers. The presence of Chinese developers will likely exacerbate the situation in Johor besides posing significant challenges to local developers. The latest being the Greenland Group’s purchase of 128 acres of waterfront land in Plentong for RM2.4bil (RM430psf). Notably, the sizeable launch of high-rise units by the Chinese within the Danga Bay/JB waterfront area will undoubtedly cast more uncertainty on residential prices in the Johor market, besides driving up land values. The purchase by Greenland adds to an increasingly crowded scene with some 13 local and foreign developers already having existing projects within Iskandar Waterfront City in Danga Bay, with a cumulative development value of RM125bil along the western corridor, which stretches from JB to Nusajaya.

- Developer’s shifting strategies. Reflecting muted sentiments, our channel checks have revealed that property developers have either scaled back planned launches or are pushing for more affordably-priced schemes in Johor, particularly landed homes for owner-occupiers. For instance, new sales target for Horizon Hills (Gamuda-UEM Sunrise JV) is significantly lower at RM200mil in FY15 (ending 31 July) vs. the RM800mil achieved in FY14 – efforts to clear existing inventories are a near-term priority. Mah Sing Group is set for its maiden launch of Bandar Meridin East – featuring mid-range landed homes (GDV of RM243mil) that account for a quarter of total planned launches in Johor (~RM927mil). For its ongoing launches, we draw comfort that Mah Sing has already obtained approvals for serviced apartment on the final parcel of commercial land within its Sierra Perdana township before the rulings took effect. By the same token, the land swap deal with KLK appears to signify UEM Sunrise’s strategic move to diversify its landbank beyond Nusajaya, with an immediate focus on landed offerings to cushion the slower Johor market. During our recent meeting with management, we understand that it targets to rake in c.RM700mil in sales from Johor out of its RM2bil base sales target for FY15F. Key launches in Johor for this FY include:- (i) Estuari @ Puteri Harbour (Phase 1: 346 high-end landed units with GDV of RM533mil); and (ii) Signature Residence @ Gerbang Nusajaya (264 units of midrange landed link homes with GDV of RM152mil). Positively, we understand that the initial launch of 43 units at Nusajaya Tech Park (JV with Ascendas) has been encouraging with a take-up rate of ~74%; this reflects the continued strength of industrial properties in Johor. Of the property stocks within our universe, UEM Sunrise has the highest exposure in Johor with some 75% of its GDV, and 77% of landbank coming from this region.

- Maintain OVERWEIGHT. That said, we reaffirm our OVERWEIGHT stance on the Malaysian property sector. While we expect residential prices to continue moving sideways in 2015, a return of pent-up demand towards end-2015 – barring external shocks – is possible as the market is still awash with liquidity. Besides that, property cooling measures and post-Goods & Services Tax (GST) impact appears to have already been priced-in, given the steep 52% discount that property stocks within our coverage currently trade at vis-à-vis their respective NAVs. With the delisting of IJM Land, Mah Sing is our top large cap pick for leverage to the next property up-cycle. Our other key BUY calls are E&O and Titijaya Land.

Source: AmeSecurities Research - 15 May 2015