Highlights

Headwinds from all sides. The KL Property Index has declined 17% from peak since end-May, due to challenges on the macro front in addition to sector-specific headwinds, which we believe will put a cap on near-term performance. In this report, we highlight the headwinds specific to the sector.

Talk of cooling measures. The government has been sending strong hints of: (1) Another possible round of RPGT hike, given the ineffectiveness of previous hikes (Figure #2); and (2) Raising the minimum property price for foreigners in certain areas to RM1.0m, from the current RM500k, albeit not on a blanket basis.

Oversupply in the making? Our study of NAPIC stats suggest that housing starts in Selangor and Johor have been strongly outpacing actual transactions (Figure #5 & Figure #6), which supports concerns of an oversupply situation.

Subdued sentiment. With these prevalent headwinds in mind, we expect a spill over effect into buying sentiment, which could make it challenging for developers to achieve their ambitious sales targets.

Impact analysis. We believe that the high rise segment, which has been heavily reliant on DIBS, would suffer more from the potential cooling measures and clouded sentiment. Landed properties should continue to enjoy robust and sustainable demand from owner-occupiers, such as Bandar Seri Sendayan @ Seremban by Matrix Concepts.

Catalysts

Infrastructure related catalysts… There are some longdated, infrastructure-related sector catalysts such as Penang Second Bridge in Sep 2013, Iskandar Malaysia, MRT and high speed rail, but the immediate effect will be limited. Others include hedge against inflation following the recent hike in petrol prices as well as record high SGD against MYR which may prompt demand from across the straits.

Risks

Rising NPL ratios and loss of holding power; margin erosion due to raw material price spikes and/or lower selling prices; slowdown in sales / cut back in launches.

Rating

NEUTRAL

We believe that these headwinds will serve to dampen expectations for property value appreciation in the near to mid term, which would be adverse for sales and launches of property developers, as well as sentiment towards the sector. This is partially offset by inflation hedging following the 20 sen petrol hike and record high SGD against MYR which may prompt demand from across the straits.

Positives: Asset reflation theme remains intact over the longer term; increased opportunities within the affordable/mass market segment.

Negatives: Slowdown in demand for mid/high end segment and economic growth; tighter lending polices by banks.

Top Picks

Matrix: Share price has proven resilient recently, due to strong optimism over its township earnings and high DY (10% for FY13, with balance 6.2% DY unpaid). TP: RM2.84.

Source: Hong Leong Investment Bank Research - 9 Sep 2013