Maintain NEUTRAL due to the absence of near-term catalyst while affordability issue lingers on. However, a mild recovery cannot be ruled out given the trough valuation and as a laggard for domestic growth play. Positive signs include the structural change, new favourable policies, and ‘zerorisation’ of GST. The negatives are the risk of falling short of sale target, policy uncertainty and overhang issue. We impute a higher RNAV discount by 5-10% across the sector as we feel the recovery period may be prolonged.

“New Malaysia”. We believe the structural change from recent GE14 result will have a positive impact on property market in the long run. The pledge to reform housing and property market is part of the promises highlighted in the new government's manifesto. Hence, policies and regulations that could excite the sector such as relaxing end-financing, aggregating the affordable home agency to tackle overhang and affordability issues could be on the cards in the near-term.

Zerorisation of GST is a positive. Building cost should be reduced as most building materials (steel, cement, sands and bricks) were not subjected to the previous SST regime and we expect the same treatment in the upcoming re-introduction. Construction price could be lowered by around 1-2% as estimated by REHDA. The savings can then be passed on to consumer via various marketing perks to improve take-up or serve as the cushion to margin squeeze from low cost projects. Besides, price of commercial properties should also be lower to buyers.

Target may fall short as sales were weak in 1H leading up to GE14 and will likely remain soft post-GE as potential buyers are adopting wait-and-see attitude, pending more clarity on the direction and policy to be shaped. As such, any potential pick up in sales is likely to only happen in 4Q18 after more policy clarity and measures as well Budget 2019 (2 Nov), which maybe too late to catch up the full year target then.

Stable leading loan indicator. Monthly property loan applications was flat (+0.2%) YoY while loan approvals were up 3.4% YoY for the 5 months period, reflecting the uncertainties attributable to GE14. Meanwhile, NPL remains steady with only non residential property loan increasing marginally to 1.32% (from 1.15% in 2017).

Laggard for domestic growth upcycle. The favourable domestic consumption play and higher disposable income may prop a mild recovery in the property sector given that the valuations are at trough, near -2SD below mean (56% discount to RNAV and 0.8x P/B under our coverage). We do not rule out the possibility of narrower discount to RNAV if new positive policy measures are introduced by the new government.

Forecast. We impute a higher RNAV discount by 5-10% across the sector to account for the possible prolonged recovery period as the sector is still searching for optimism with the risk of falling short of sales target this year.

Maintain NEUTRAL due to the absence of near-term catalyst with lingering overhang and affordability issues. However, a mild recovery of interest in the sector cannot be ruled out given the trough valuation and domestic growth focus theme from led by favourable domestic economic condition and possible introduction of new policies.

Top Picks. We continue to like Sunway (BUY, TP: RM2.19 ) as an underappreciated property-construction conglomerate with mature investment properties, growing trading division and potential listing of healthcare business. MB World (BUY, TP: RM2.63 ) is our small-cap pick given its first mover advantage to capture the spill over effect from the growth in the RAPID project in Pengerang and Desaru Coast.

Source: Hong Leong Investment Bank Research - 9 Jul 2018