Property sector
We expect Budget 2011 to support the government's Economic Transformation Programme, aimed at propelling Malaysia into becoming a high-income nation. Higher real property gains tax (RPGT) and restrictive loan-to-value (LTV) caps will be deterrents to foreign direct investment (FDI) and high net worth individuals. While it is important to ensure a healthy property market, the risk of a property bubble in Malaysia is relatively low. Affordability remains high and the sharp price appreciation that has been seen is mainly limited to landed residential properties in prime locations. A LTV cap based on the number of properties owned, location and/or value may be difficult to implement - banks would be better off managing the risk on their own. Policy tightening in regional markets saw initial negative knee-jerk reactions, but share prices rebounded to surpass pre-policy levels (Singapore, Hong Kong) while property prices largely held up (but sales volume fell). Demand should continue to be supported by Malaysia's positive macro factors - young population, urbanisation, shrinking household size, rising income, inflation hedging, and strengthening ringgit.

We see huge re-rating potential from the transformation of Kuala Lumpur into a more livable and vibrant city. More details will likely be unveiled on the MRT, LRT extension, and government land redevelopment that could involve large private sector participation and FDIs (EPF, 1Malaysia Development Bhd, the Qatar Investment Authority and the UAE's Mubadala Development Company have committed to date). Sure winners will be the current owners of large pieces of prime land with international development potential in Kuala Lumpur (S P Setia Bhd, Bolton Bhd and DNP Holdings Bhd). While it is trickier to guess the direct beneficiaries of government land redevelopment, GLCs and bumiputera developers have the upper hand (Malaysian Resources Corp Bhd, Boustead Holdings Bhd, Glomac Bhd, Bolton and S P Setia).

The Malaysian property sector is one of the biggest laggard sectors post-financial crisis. Regional peers have fared much better, despite higher policy risks with property prices appreciating more steeply. While the Malaysian property sector's P/BV and P/RNAV multiples have recently inched up to 0.88 times and 0.68 times (slightly ahead of historical means of 0.77 times and 0.61 times, respectively), valuations are still a far cry from the 2-SD seen in 2004 and 2007, when re-rating was driven by strong sales momentum and positive policy changes - similar to what we are seeing now. At their peak, property stocks traded close to RNAV, while sector leader S P Setia fetched a 20% premium with foreign ownership hitting 56% (22% currently). - Hwang DBS Vickers Research, Oct 12