KUALA LUMPUR (Jan 4): RHB Research has turned "overweight" on the property and real estate sector, as the interest rate upcycle is expected to slow down in the first and second quarters of 2023 (1Q-2Q2023) amid lower political uncertainties.

In a note on Wednesday (Jan 4), analyst Loong Kok Wen stated that property valuations had factored the negative impact of interest rate hikes on housing demand, but with the rate hikes frontloaded, the pace of the increase in interest rates is expected to decelerate in 2023.

“Based on our checks, the market generally expects another 25- to 50-basis-point hike in the overnight policy rate in the first half of 2023,” said Loong.

“This interest rate upcycle may possibly approach its end in 1Q-2Q2023," she said.

Meanwhile, Loong highlighted that the risk of political uncertainties is now lower, based on the conclusion of the 15th general election (GE15) that had provided the market with new catalysts.

“Prime Minister Datuk Seri Anwar Ibrahim managed to secure a vote of confidence in Parliament in December 2022.

“Given his stronger position in policymaking now, the market should have higher expectations for economic growth, along with a stronger inflow of foreign direct investments,” the analyst added.

In addition, RHB Research also added that the high-beta sector with depressed valuations may outperform, despite the sector still trading close to -2SD (standard deviation), offset by a rebound post GE15.

“The KL Property Index hit its recent low in mid-October 2022, just before the GE15 was called.

“As the equity market sentiment improves, with expectations of some meaningful economic reforms ahead, we expect the high-beta property sector to also outperform, especially given the current depressed valuations.”

“We are also encouraged by the fact that the property sales momentum has not weakened much, despite the unfavourable macroeconomic factors in 2022. Hence, downside risks to developers’ earnings should be mitigated going forward.”

Regionally, Loong added that China's recent signal to soften its stance on its zero-Covid policy is favourable in restoring economic growth in the region.

“Although not many local developers have sizeable exposure to the Chinese market, we think the easing of financial restrictions is important to alleviate market fears,” said Loong.

RHB Research’s top picks for the property and real estate sector are IOI Properties Group Bhd (target price: RM1.40) and Sunway Bhd (RM2.06), with a "buy" rating for both stocks.