Moving into 2022, developers are cautiously optimistic on property sales and are targeting marginally higher to flattish sales YoY. With the HOC ending on 31 Dec 2021, developers will need to continue providing goodies in order to attract bookings and sales. Overall, we expect 2022 to continue facing a tough operating environment and lack of near-term catalyst to entice property transaction. The low valuations (i.e. P/B) should provide some downside support to the sector. Maintain our NEUTRAL sector rating, with top picks being Sunway, Matrix and Lagenda.

Sales. Sales figures for the recent results quarter (i.e. 3Q21) showed that on average, companies are on track to achieve their respective full year targets. For 2022, we gathered that developers are cautiously optimistic on property sales and are targeting flattish to marginally better sales YoY.

Stats. 3Q21 showed relatively healthy property transactions with residential volume of 42,620 units being transacted (+7.2% QoQ, -23.7% YoY). 52.7% of these units transacted are houses priced below RM300k, followed by 25.8% of houses priced at 300k-500k, indicating that demand of affordable housing remained strong in 3Q21. Unsold residential properties edged down to 30,290 units (-2.6% QoQ, -2.1% YoY) as we understand most developers focused on clearing inventories while being cautious in launching new products during the pandemic. High-rise units make up 60.2% of the total overhang units while 2-3 storey terrace houses make up 33.3%, indicating buyers still preferred landed properties over condominiums.

Leading loan indicator. Oct 2021 mortgage applications moderated to RM31.9bn (+19% MoM, +9.7% YoY) after chalking in all time high of RM36.7bn back in Apr 2021. Nevertheless, Oct 2021 loan approvals remained low at 32.2% (+1.6% MoM, -14.4% YoY) as buyers still grapple with affordability issue. We reckon that this is due to the high level of household debt-to-GDP (89.6% in 1H21), which contributed to the disqualification of mortgage loan due to already high debt service ratios (DSR) coupled with the loss/reduced income during the pandemic.

2022 outlook. As our economic recovery becomes more entrenched in 2022, our economics team expects BNM to increase OPR by 25bps in 4Q22 to 2.00%. While the increase in OPR is expected to put a dent on the mortgage loan application (due to concerns on reduced affordability as well as higher interest cost for project financing), we reckon that the impact will still be manageable as OPR rate will still remain low at 2.00% in 2H22 (vs pre-Covid of 3.00%). Our simulation shows that a 25bps rate hike will have +3.2% impact on monthly loan repayments, while a 50bps rate hike will have +6.5% impact. There was also no news/announcements on the extension of HOC, which will end on 31 Dec 2021. Based on our channel checks, we note that developers are already prepared for HOC to end and we expect them to absorb the stamp duty fees as well as provide discounts for their products in order to attract bookings. Overall, we expect 2022 to continue facing a tough operating environment (i.e. overhang, affordability, rising interest rate environment) and the lack of near-term catalyst to entice property transaction. Nonetheless, given the low base impact of 2020 and 2021, we reckon 2022 may potentially see improved transaction volumes as the economy recovers from the pandemic.

We maintain our NEUTRAL stance on the sector as it lacks near-term catalysts. The low valuations (in P/B terms) should provide some downside support to the sector. 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: RM2.54) and Lagenda (BUY; TP: RM2.00) as they ride on the affordable housing theme coupled with dividend yield of 5-7%.

Source: Hong Leong Investment Bank Research - 21 Dec 2021