With regards to the structural issues in the property market, notable suggestions to solve the issues include a vacancy tax and moving towards a Build-then-Sell from a Sell-then-Build model. These initiatives would ultimately push the responsibility of the project take-up to the developers, ensuring that developers will carefully cater their products and volume of launches moving forward. We maintain our NEUTRAL stance on the sector due to the absence of near-term catalysts to warrant a broad-based re-rating in our sector call.

The Following Are Key Takeaways From the Property Event Hosted by Us Last Week:

Savills Malaysia. Ms Amy Wong, Director of Savills Malaysia, presented on the residential property and office market outlook, focused mainly on Klang Valley, Penang, and Iskandar Johor. She notes that slight improvements in the residential loans applied and approvals could be due to better priced houses and pent up demand (holding back pre-GE14). Incoming supply of residential properties appear to hover around 100k units over the next 3 years while the average yearly transactions only make up c.25k units a year. Furthermore, number of auctioned property spiked to 32.6k cases (RM15.6bn) in 2018 vs 26.1k cases (RM9.8bn) back in 2016. She believes the market will be revived if more incentives are focused on the M40 instead of the B40.

Khazanah Research Institute. Dr. Suraya Ismail, Director of Khazanah Research Institute, presented on the structural issues plaguing the residential property market. With the common perception that high property prices are caused by high land prices, Dr. Suraya takes the opposing view and states that land price is instead a function of expected GDV of the respective project. She notes that if developers do not expect to generate such high GDV, they would not bid for land at such prices, thus preventing land prices from escalating. Developers which entered late to the game are now stuck with high land prices, thus preventing them from launching more affordable products to cater to the current market demand. Another issue is that affordable homes should be priced based on the affordability of states and not the country as a whole. Note that the median income can vary significantly from state to state e.g. Kelantan being RM3k while Kuala Lumpur being RM8k. The affordable homes should also take into account accessibility as a project with bad accessibility and quality would require households to incur further daily costs which exacerbate the affordability issue.

Possible solutions. Notable suggestions brought up to solve the structural issues in the market include a vacancy tax on both the office and residential properties which are unsold or unoccupied after a certain period of time. In addition, Dr. Suraya believes the market should also be reformed from the supply side as the initiatives to spur demand are currently sufficient; e.g. HOC2019 and cheaper lending to those in need. An example of a supply side reform would be that developers start moving from a Sell-then-Build (STB) model towards a Build-then-Sell (BTS) model for its launches. Note that in most developed countries, the general ratio of BTS:STB model is approximately 90:10. These initiatives would ultimately push the responsibility of the project take-up towards the developers, ensuring that developers will carefully cater their products and volume of launches moving forward.

Maintain NEUTRAL. We maintain our NEUTRAL stance on the sector due to the absence of near-term catalysts to warrant a broad-based re-rating in our sector call. We continue to like Sunway (BUY, TP: RM2.17) as an underappreciated property construction conglomerate with mature investment properties, growing trading and quarry division and potential listing of healthcare business. MB World (BUY, TP: RM2.75) 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 - 7 Oct 2019