Based on 4MFY20 figures, monthly residential property loan applications and loan approvals were down YoY by -23.7% and -30.6%, respectively (due to MCO). The recent government initiatives should spur demand but we caution that buyers may still opt to wait out on property purchases with Covid-19 taking a toll on the broader economy. Most developers under our coverage have yet to officially revise the previously set sales target but have notified the likelihood of a revision. We also expect planned launches to likely be pushed back. We maintain our NEUTRAL stance on the sector, due to the overall economic impact of Covid-19 despite some efforts by the government to uplift demand. Our top picks remain with Sunway (TP: RM1.95) and Matrix (TP: RM2.06).

Statistics. The number of overhang residential units as of 1Q20 (latest data available) stands at 29,698 units, which shows a 191.7% increase from 10,181 units back in 2014 but a mild decrease of -9.8% from the peak of 32,936 units in 1Q19. The slight improvement seen recently can be attributed fewer completions coupled with increased transaction volumes. Nonetheless, over 60% of these transactions are for houses priced below RM300k, which generally do not provide sustainable margins for developers. Based on 4MFY20 figures, monthly residential property loan applications and loan approvals were down YoY by -23.7% and -30.6%, respectively, given the impact of the MCO restrictions from mid-March. NPL for residential/non-residential property loans remains steady at 1.19%/1.41% albeit the residential loans inching up slightly from 1.10% YoY.

Government initiatives to support demand. The recent Short-Term Economic Recovery Plan introduced three key initiatives to support the property market which comprises of: i) Reintroduction of HOC to mid-2021; ii) RPGT exemption for disposal of residential homes from June 2020 to Dec 2021 for up to 3 residential homes per individual; and iii) 70% margin of financing limit for third housing loan onwards for properties valued RM600k and above, will be uplifted during the HOC. While these measures should spur demand, we caution that buyers may still opt to wait out on property purchases with Covid-19 taking a toll on the broader economy (our economics team is looking at -5% GDP for 2020).

2020 sales and launch targets. Most developers under our coverage have yet to officially revise the previously set sales target (with the exception of SP Setia lowering sales target to RM3.8bn from RM4.55bn) but have notified the likelihood of a revision in the near-term. With regards to launches, we expect a pushback on the previously planned launches given the stall in operations during the MCO period. Despite the ease of restrictions during the RMCO, we still expect a window period before launches would take place in order to achieve a better take-up; e.g. IOIPG which carried out its launches in China c.2 months after the lifting of lockdown.

Forecast. Unchanged. We maintain our NEUTRAL stance on the sector, due to the overall economic impact of Covid-19 despite some efforts by the government to uplift demand. However, the trough valuations (coverage universe P/B at 0.5x or more than -2SD below 5-year mean) should lend some support on the downside. For our top picks, we continue to like Sunway (BUY, TP: RM1.95) as an underappreciated property-construction conglomerate with mature investment properties, growing trading and quarry division and potential monetisation of healthcare business. We also like Matrix (BUY, TP: RM2.06) as it rides on the affordable housing theme within its successful townships with cheap land cost and sustained property sales coupled with future potential job flows from its Indonesian venture. Its dividend yield of over 6% remains one of the highest in the sector.

Source: Hong Leong Investment Bank Research - 20 Jul 2020