While the Low Interest Rate Climate and Reintroduction of HOC Are Supportive to Developers, FMCO Will Weigh on Consumers’ Sentiment Towards Purchasing Properties and Affordability Remains An Issue. We Reckon That the Sector’s Recovery Will be a Gradual One, Corresponding to the Phases of the NRP With Phase 2 Possibly Allowing Ramp Up in Site Works and Pha Se 3 the Reopening of Showrooms. Nonetheless, We Do See a Bright Spot in the Affordable Segment Catering to Basic Demand for Housing of Owner-occupier (vs Investor). Maintain Our NEUTRAL Sector Rating, With Top Picks Being Sunway, Matrix and Lagenda.

Sales numbers on track. Sales figures for the recent results quarter showed that on average, companies are on track to achieve their respective full year sales target. We understand that Sunway will revise upward its sales target of RM1.6bn having achieved 72.5% in 1Q. Moving into 2Q, property developers saw that their Apr-May sales sustaining, however, June numbers have taken a hit from implementation of FMCO. Nonetheless, we foresee some pent-up demand in 4Q21 (similar to last year) given the vaccination progress ramp up, eventual economic reopening, continued low interest rate environment and HOC extension till year end.

Stats. Overall, NAPIC stats showed relatively healthy property transactions with 1Q21 residential transactions volume of 52,273 units being transacted (-13.2% QoQ, +11.1% YoY). 57% of these units transacted are for houses priced below RM300k, followed by 24% for houses priced 300k-500k, indicating that demand of affordable housing remained strong in 1Q21. Unsold residential properties continued to decline (- 10% QoQ, -16.6% YoY) as we understand most developers focused on clearing inventories in the absence of new launches. High-rise units make up 58.1% of the total overhang units while 2-3 storey terrace houses make up 25.7%, indicating buyers still preferred landed properties over condominiums.

Leading loan indicator. Apr mortgage applications chalked in another all-time high of RM36.7bn (+1.7% MoM, +451.2% YoY). Moving into May 2021, mortgage application moderated by -10% MoM to RM33.0bn. Meanwhile May loan approvals rose to RM12.0bn (-4.4% MoM, +252.2%), bringing up Jan-May 2021 approval to RM52.6bn (+98.0% YoY). The strong rebound was due to a low base effect from MCO1.0 SPLY, coupled with the current low interest rate environment. Nonetheless, Jan-May 2021 approval rate declined to 34.6% from 37.4% SPLY suggesting that although demand is there, it may not result to exceptionally stronger transactions (i.e. an affordability issue). It is worth noting that the loans approved in absolute terms still showed growth of +98.0% (vs in Jan-May 2020) and +18.8% (vs in Jan-May 2019).

2H21 outlook. While the low interest rates and reintroduction of HOC is supportive to developers, we expect consumer sentiment to remain subdued as we believe property buyers will adopt a wait-and-see approach until sustainable economic reopening is seen. Overall, we expect the property market recovery to be gradual, corresponding to the various phases of the NRP with Phase 2 possibly allowing ramp up in site works and Phase 3 the reopening of showrooms. We continue to see a bright spot in the affordable segment catering to basic demand for housing of owner-occupiers (vs investor).

We maintain our NEUTRAL stance on the sector as we expect the recovery to be a gradual one. Furthermore, the sector’s valuations look fair as stocks are trading at - 0.5SD below its 5-year mean P/B. For top picks, we continue to like Sunway (BUY, TP: RM2.58) as an underappreciated property-construction conglomerate with mature investment properties, growing trading and quarry division. We also like Matrix (BUY, TP: RM2.16) and Lagenda (BUY; TP: RM2.01) as they ride on the affordable housing theme on successful townships with cheap land cost and sustained property sales coupled with dividend yield of 5-7%.

Source: Hong Leong Investment Bank Research - 7 Jul 2021