Highlights

Given the imminent rate hike by BNM, we deemed it timely to assess the potential impact on affordability and demand.

Impact on monthly payments. Our simulation shows that a 25bps rate hike will have 3.00% impact on monthly payments, while a 50 bps rate hike will have circa 6.0% impact (Figure #1 and Figure #2).

Erosion of housing affordability. Our simulation study suggests that in the current base case (BLR – 2.4%), a RM3,000/month instalment amount will be able to afford a property worth RM681k. A 25bps rate hike will reduce the affordable property price by 2.92% to RM662k while a 50bps rate hike will have an impact of -5.71% (Figure #3).

Cooling off loan appetite? From the beginning of 2014, we saw an uptick in loan applications (Figure #4), but we believe this trend is likely to cool off following re-pricing of the BLR by the banks.

Negative near-term impact on property sector. Historically, we have also noted that the negative impact of rate hike on the property sector, due to concerns on reduced affordability of properties as well as higher interest cost for project financing (Figure #5).

Overall takeaway. All in, given the challenging situation in terms of property sales following the removal and DIBS and various incentive schemes by developers, we expect this the subdued sentiment to be prolonged should a rate hike occur, and we re-iterate our NEUTRAL view on the sector. Developers who cater to the mass market segment in growth areas will be better equipped to handle the new challenges post the rate hike.

Rating

NEUTRAL

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

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

Top Picks

Tambun Indah (BUY, TP RM2.55) - Offers the purest exposure to Penang mainland. We have recently upgraded our RNAV and TP as our findings suggests it has scope to raise selling prices given that similar projects nearby are selling at 20-40% premium.

Matrix Concepts (BUY, TP RM4.51) - Share price continues to perform well, thanks to strong optimism over its township earnings and decent DY (5.5% for FY14).

IOIPG (BUY, TP RM3.78) - Our top big-cap pick; rich in landbank in hotspots such as Southern KL (Puchong, Bangi) and outskirts of Johor with low land costs.

Source: Hong Leong Investment Bank Research - 10 Jul 2014