KUALA LUMPUR (Aug 15): Property stocks extended losses in the evening session on Thursday, as weaker-than-expected financial results from S P Setia Bhd (KL:SPSETIA) triggered profit taking in the sector.

Bursa Malaysia's most active counter on Thursday, S P Setia shares closed 23 sen or 15.13% lower at RM1.29. It was the fourth biggest decliner on Bursa Malaysia.

Market observers attributed the heavy selling in S P Setia to the larger-than-expected losses from its Battersea project in the UK, which also dragged its project partner Sime Darby Property Bhd (KL:SIMEPROP) and sparked profit taking across the sector.

At home, there are also emerging concerns in the sector about higher affordable housing requirements for property projects in Kuala Lumpur announced recently.

Sime Darby Property, which was the third most active counter and eighth biggest decliner, ended the day 18 sen or 12.08% lower at RM1.31. The counter saw 100.12 million shares exchanged hands.

S P Setia saw some 142.23 million shares change hands, just under 10 times its 65-day moving average of 14.6 million shares. Sime Darby Property saw 100.12 million shares traded, over four times its 65-day moving average of 29.82 million shares.

The Bursa Malaysia Property Index, which tracks 98 constituents, was the largest losing sector, down 3.29% or 35.53 points to 1,043.85, after falling as much as 3.62% in the evening session. The benchmark KLCI conversely was up 0.04% at market close.

Of the Property Index's 98 component stocks, 49 ended lower, compared with 16 gainers, while 33 closed unchanged.

Other large cap property stocks which fell heavily were UEM Sunrise Bhd (KL:UEMS) — down three sen or 2.89% to RM1.01, IOI Properties Group Bhd (KL:IOIPG) — down eight sen or 3.72% to RM2.07, and KSL Holdings Bhd (KL:KSL) — down six sen or 3.37% to RM1.72.

Nonetheless, S P Setia’s and Sime Darby Property’s shares are still up 61.25% and 109.6% this year, respectively. The Bursa Malaysia Property Index is still up 21.08% in the same period as the second top sector gainer after construction, having gained as much as 34.64% earlier.

Battersea surprise drag

A few research houses have downgraded S P Setia due to unexpected higher losses from the Battersea project, related to guaranteed rental agreements provided to buyers of an office tower.

Battersea Project Holding Co Ltd, the project company, is jointly owned by S P Setia and Sime Darby Property holding 40% each while the Employees Provident Fund has the remaining 20%.

“The JV [joint venture] company for the Battersea project in the UK has sold an office tower to buyers with a rental guarantee agreement. Under this agreement, the JV company is obligated to provide a five-year rental guarantee to the purchaser,” UOB Kay Hian noted in a research note.

Since the building was completed in April this year, the group has experienced losses in 2QFY2024 because the office had not yet met the required net operating income outlined in the agreement.

The research house estimates that at least about half of S P Setia’s 2QFY2024 losses of RM101 million can be attributed to this. Sime Darby Property has yet to release its financial results for the quarter ended June.

“These losses were unexpected, as earlier guidance from management on Battersea losses did not account for this,” it added. Moving forward, it thinks these losses could persist until the office tower reaches an optimal occupancy rate.

“Since S P Setia had made an impressive run in its share price, it is totally relatable to funds locking in their profits,” said a fund manager, who declined to be named.

New housing policy weighs

It was reported last week that Prime Minister Datuk Seri Anwar Ibrahim had instructed the Federal Territories Department and the Kuala Lumpur City Hall (DBKL) to incorporate Madani housing blocks in every new residential project.

The suggested requirement, whereby a full block or two need to be made into Madani housing instead of a set percentage, will naturally cause a further increase in the free market prices for those who are not eligible for affordable housing, stated the Real Estate and Housing Developers’ Association Malaysia (Rehda).

Rehda warns that this requirement may exacerbate the mismatch of supply and demand of properties.

Meanwhile, some brokers think that property stocks have run way ahead of fundamentals and find it increasingly hard to find value among them.

Kenanga Research, which holds an counter-consensus view on the property sector with “underperform” rating since May 2024, had advocated investors who are taking an immediate- to short-term view on the data centre and Johor economic transformation themes to lock in profits in view of rich valuation in its July 2024 sector report.

“While we believe these investment themes may still have legs over the long term, investors will have to be prepared for a much lower return as the easy money has already been made upfront,” it noted.

On S P Setia, Kenanga Research ascribed higher-than-average discounts to its revalued net asset value (RNAV) than its peers, to reflect the opinion of low realisability of gross development value (GDV). In another way, this could mean heavy landbank sales targets for FY2024.