We expect most property developers to report weaker sales in 2019 with fewer new property launches. But most property companies’ focus on reducing inventories over the past 2 years has paid off with the property overhang easing in 2019. We expect property demand to see a slow recovery in 2020 given affordability issues and weak market sentiment, with muted sector core EPS growth of 6% yoy in 2019E and 7% yoy in 2020E on the back of higher revenue and profit margins. Maintain Neutral sector call: top BUYs are Sunway, IOI Properties and UOA Development.

Weak Property Sales

We believe property sales peaked in 2018 and started to ease in 2019 for most property developers. Several property developers including SP Setia cut their sales targets due to the challenging local property market conditions, ie, weak demand and stiff competition. However, the Home Ownership Campaign (HOC) stamp-duty waiver extension to end-2019 supported the recovery in housing demand. We believe the Budget 2020 measures to liberalise foreign ownership of condominiums and service apartments, introduce a government-supported Rent-to-Own (RTO) scheme and recalibrate the Real Property Gains Tax (RPGT) will sustain the recovery in 2020.

Reducing Inventories

The residential property overhang fell 3.8% YTD to 31,092 units in 9M19, representing 25.7% of total units launched, while the total value of overhang units fell 5.5% to RM18.77bn as at end-3Q19. According to the Housing and Local Government Minister Zuraida Kamaruddin, the HOC generated total sales of RM23.2bn in 2019, surpassing the government’s initial target of RM17bn. We believe overhang units fell further in 4Q19, driven by last-minute buying to benefit from the HOC stamp-duty waiver. Similarly, aggregate inventories for the property developers under our coverage fell 11% YTD to RM19.5bn at end- 3Q19.

Slow Earnings Recovery

We expect sector core EPS to rebound 6% yoy in 2019E from a low base after an 18% yoy contraction in 2018. Sustained revenue growth and a slow recovery in profit margins should drive core EPS growth of 7% yoy in 2020E. We believe most property developers’ financial positions improved with lower inventories reducing average net gearing to 0.38x in 2019E from 0.40x in 2018. The moderate net gearing level will allow most developers to weather the current industry slowdown.

Remain Neutral on the Property Sector

We reiterate our NEUTRAL call on the Property Sector as market conditions remain challenging. This is reflected in the current low sector valuations with average 2020E core PER of 13x and Price/Book of 0.6x. This may spark an industry consolidation or major shareholders taking property companies private. We prefer developers with overseas property exposure and strong financial position. Our top BUYs are Sunway, IOI Properties (IOIPG) and UOA Development.

Source: Affin Hwang Research - 15 Jan 2020