KUALA LUMPUR (Aug 6): Property stocks, which rallied over past few months, were among the hardest hit counters on Bursa Malaysia in the recent global equity rout as investors rushed to take profits as market sentiment was shaken by external headwinds.

Still, the party has just started and is likely far from over given the fundamental reasons and undemanding valuation.

Despite an 18.9% year-to-date gain, the Bursa Malaysia Property Index, which tracks 98 property counters, is now trading at a price-to-book (P/B) of 0.61 times, a 10.8% discount against its 15-year averages, according to The Edge’s computation.

The historical period of 15 years covers the explosive upcycle backed by favourable buying schemes and also the slump cycle related to supply overhang — which eventually balances out the cyclicality effect.

For the top 20 largest property counters in terms of market capitalisation, 13 of them are now trading below the 15-year long-term averages.

Notably, property stocks that are now trading near or above one time P/B valuation include HCK Capital Group Bhd (KL:HCK), Radium Development Bhd (KL:RADIUM), Matrix Concepts Holdings Bhd (KL:MATRIX), Sime Darby Property Bhd (KL:SIMEPROP), Mah Sing Group Bhd (KL:MAHSING), Eco World Development Group Bhd (KL:ECOWLD) and Crescendo Corp Bhd (KL:CRESNDO).

Property companies seldom trade above the underlying value of their net assets simply because investors need to take into account the companies’ debts, and illiquidity discounts or the difficulty of quickly liquidating large real estate holdings, among others.

It is worth noting that Mah Sing, Eco World Development, Sime Darby Property, and Crescendo have recently announced data centre related developments or land sales.

Maybank Investment Bank Research analyst Wong Wei Sum upgraded the property sector to “positive” from “neutral” previously, on grounds of value emergence.

This comes as the mean forward 2025E P/B valuation for the property stocks covered by Wong has dropped to 0.75 times from 0.9 times on July 23.

“Investors should take the opportunity to accumulate property stocks backed by strong fundamentals and thematic during this market correction,” Wong wrote in a note on Tuesday.

The analyst pointed out that the near-term catalyst will be the Johor-Singapore Special Economic Zone (JSSEZ) where more details will be announced between September and October 2024.

Malaysia and Singapore signed a memorandum of understanding in January to work on the JSSEZ, which targets sectors related to electronics, financial services, business-related services and healthcare, and to strengthen economic connectivity between Johor and Singapore.

The speculation is that JSSEZ will likely include the entire Iskandar Malaysia and Pengerang area, covering a size of 3,505km2, involving six local authorities — Johor Baru City Council, Iskandar Puteri City Council, Pasir Gudang City Council, Kulai Municipal Council (including Sedenak), Pontian Municipal Council and Pengerang Municipal Council.

Property stocks seen exposed to the JSSEZ include IOI Properties Group Bhd (KL:IOIPG), UEM Sunrise Bhd (KL:UEMS), Sunway Bhd (KL:SUNWAY), S P Setia Group Bhd (KL:SPSETIA), Eco World Development, KSL Holdings Bhd (Kl:KSL) and Mulpha International Bhd (KL:MULPHA).

Meanwhile, listed plantation companies that could benefit from the JSSEZ include SD Guthrie Bhd (KL:SDG), Kuala Lumpur Kepong Bhd (KL:KLK), Johor Plantations Group Bhd (KL:JPG) and Genting Plantations Bhd (KL:GENP).

Besides, data centre remains one of the key drivers for property developers. “We believe that the thematic driver for the sector over the medium term will be data centre investments, which could accelerate the monetization of land value. Any land sales should strengthen developers’ net gearing in the coming quarters,” said Wong.

The analyst also noted that surprises from the revival of KL-SG high-speed rail could provide short-term trading opportunities.

Multi-year property upcycle in play

Hong Leong Investment Bank Bhd analyst Tan Kai Shuen holds the view that a multi-year property upcycle is now set in motion, driven by the rise in industrial developments, especially from rising foreign direct investments. This could provide developers a new avenue of growth and is more attractive than residential projects given that it has higher margin and shorter construction period.

Tan also noted the decentralisation of economic development and rise of second tier cities, as well as the spill-over benefits of job creation, which may lead to residential demand in the vicinity of industrial facilities.

“The rise in second-tier cities and industrialisation in states like Johor, Penang, Kedah and Sarawak could see these states entering into a rapid phase of economic development in years or even decades to come,” he said.

The other positive catalysts include rising land value supported by industrial and economic developments as well as solar farm development potential.

Tan also highlighted that in a property upcycle, developers that will see the largest re-rating in stock price are those that have large land banks, and are pure-play developers.

“Developers that have large land banks will undoubtedly benefit the most with land value appreciation. Conversely, developers that have lower land bank could find themselves at a disadvantage compared to peers as land value appreciation also means that the land acquisition cost is increasing and these developers will have to launch their projects at a higher price point to preserve margins,” he wrote.