Highlights

We met with a prominent local property consultant and came with the following key takeaways on the sector:

Johor: Remains very much viable in the long-term, with sustainable demand to be underpinned by Singaporeans, as property prices in Iskandar are ~20% that of Singapore, making it attractive for SMEs to relocate there. Medini continues to see a high level of activity, with 65% of buyers being Malaysian. The consultant believes that high-rise projects could face some challenges, especially with recent launches at RM1000-1200 psf, but opines that landed projects will continue to do well with both local and foreign buyers.

Penang: The commencement of the Second Bridge opens up opportunities for landbank in the Batu Kawan / Simpang Ampat stretch, and is attracting interest. The outlook for Penang is positive, with the main driving forces being improved infrastructure and ongoing economic activities. In addition, the potential theme park is expected to provide a boost for tourism on Penang Island.

Klang Valley: Activity is slowing down as developers defer launches, in response to cautious buyer sentiment and restrictive measures such as the removal of DIBS. Location, pricing and product positioning will become crucial this year – as an example, Mah Sing’s Southville @ Bangi and SP Setia’s EcoHill @ Semenyih have been well-received by buyers with takeup rate exceeding 80%.

Overall takeaway: All in, we remain neutral on the sector. Given the cautious sentiment and slowdown in new launches by developers, we need to continue to monitor the takeup rate and impact on earnings.

Catalysts

Infrastructure related catalysts; inflation hedging virtues of property; sustainable demand; high affordability ratio; declining NPL ratio for property loans.

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

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 policies by banks.

Top Picks

IOI Properties (BUY, TP RM3.85): IOIPG is our top pick within the sector, as we like it for its diversified landbank. Key catalysts to rerate the stock include Phase 1 of IOI City Mall in Putrajaya (slated to open in end 2014), the slew of launches in Malaysia to underpin earnings, potential inclusion in the Syariah list in May, and room for higher dividend payout given its strong balance sheet.

Source: Hong Leong Investment Bank Research - 2 May 2014