Post-budget, Finance Minister LGE further stated that the lowering of foreign ownership threshold on high rise properties, effective in 2020, only covers unsold existing inventories. Minister Zuraida then clarified that the lowering of threshold was actually a proposal from the Finance Ministry and that further discussions will be held to determine if there is a need for it to be reviewed. Note that each state government can still set its own price thresholds for foreigners based on the current situation in their respective states. A quick channel-check with the companies under our coverage indicates that exposure to such properties are not significant. Hence, we believe the positive impact towards the companies under our coverage to be relatively marginal. 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 recently announced Budget 2020 proposed multiple efforts to stimulate the property market. We now take a closer look on some of the key initiatives.

Lowering of foreign ownership threshold. The government proposed to lower the threshold on high rise property prices in urban areas for foreign ownership from RM1m to RM600k. The initiative was targeted to reduce the supply overhang of such units estimated to amount over RM8.3bil as of 2019. Post-budget, Finance Minister LGE further stated that this measure, effective from Jan 1 to Dec 31 2020, only covers unsold existing inventories and excludes new projects yet to be launched. Housing and Local Government Minister Zuraida Kamaruddin had also then clarified that lowering of threshold was actually a proposal from the Finance Ministry and that further discussions will be held to determine if there is a need for it to be reviewed. It was also mentioned that each state government can still set its own price thresholds for foreigners based on the current situation in their respective states e.g. Penang which has a different statistical overview compared to Johor. A quick channel-check with the companies under our coverage indicates that exposure to such properties (i.e. unsold high rise units to benefit from the lowering of threshold) are not significant. Hence, this coupled with the fluidity of the situation leads us to believe the positive impact towards the companies under our coverage to be marginal.

Change in base year for RPGT. The base year used to calculate Real Property Gains Tax (RPGT) imposed will be set at 1 Jan 2013 for properties acquired before 1 Jan 2013, as compared to the previous base year of 1 Jan 2000. This effort will essentially reduce the RPGT previously imposed on genuine home owners looking for an upgrade. As a reference, the Malaysian House Price Index rose 92.9% from the year 2000 to 2013 and further increased by 40% from the year 2013 to 2019. Recall that the Developer Interest Bearing Scheme introduced back in 2009 contributed to an increase in average house prices and was subsequently abolished in 2014. Overall, we reckon that this initiative may encourage the return of some genuine buyers/ upgraders back to the market.

Maintain NEUTRAL. We maintain our forecasts and NEUTRAL stance on the sector despite having 5 BUY calls out of the 8 companies under our coverage, due to the absence of near-term catalysts to warrant a re-rating in our sector call. However, we do not rule out a possible mild recovery of interest towards the sector given the trough valuations (coverage universe P/B at 0.7x or -2SD). For our top picks, 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 spillover effect from the growth in the RAPID project in Pengerang and Desaru Coast.

Source: Hong Leong Investment Bank Research - 24 Oct 2019