We are upgrading the PROPERTY Sector to NEUTRAL fromUNDERWEIGHT. The sector will be unexciting because of weaker fundamentals onthe back of a tighter banking liquidity. We also believe that the Malaysianproperty sector has hit peak demand after two consecutive years of >20% YoYgrowth in sales. But downside risk will be cap by 1) developers' strongearnings visibility; 2) changes of sales mix towards the affordable segmentplus Johor products will buck the general flattish trend and allow for decent salestargets; 3) the market has probably priced in the negatives in the sector; 4)Bank Negara unlikely to introduce further tightening measures. We reiterateOUTPERFORM on UEMLAND (TP: RM2.65) and UOAD (TP: RM1.65) while MARKET PERFORMratings are maintained on SPSETIA (TP: RM3.90), IJMLAND (TP: RM2.28), MAHSING(TP: RM2.18).

We retainedUNDERPERFORM ratings on E&O (Top UNDERPERFORM; TP: RM1.49) and HUNZA(TP: RM1.44). M-REIT and property investment remains as OVERWEIGHT as 'flight tosafety' options given our 2Q12 house view of 'top slicing', with CMMT (OP; TP:RM1.55) and KLCC Property (MP; TP: RM3.45). Listing of IGB REIT will keepvaluations high. The market's anticipation of KLCC potentially REIT-ing some ofits assets will also add excitement to the sector, although we believe it willnot likely be in the near term (refer to our 21/3/12 report, 'REIT-ing?'). Our2Q12 Top OUTPERFORM is Axis REIT (TP: RM2.82) for 1) its strong acquisitionpipeline, which allows for faster NAV growth and hence quicker realisation ofits valuations;  2) limited officeoccupancy risks given its quality tenants; 3) there being less choices of goodoffice/industrial REITs compared to retail ones and 4) its net dividend yieldof 6.0% is higher than CMMT's 5.5%.  4Q11results were mainly within expectations, save for UEMLAND which exceeded our estimate. Developers enjoyed strongearnings growth of >40% for 2011 given their last two years' strong sales.Hunza Properties was the exception with a sharp earnings decline of 30% as ithad held back launches. Generally, the developers were able to meet their 2011sales targets, implying a 10%-50% YoY growth in sales. Meanwhile, propertyinvestment and M-REITs results under our coverage came in withinexpectations. 

Weak fundamentalswill keep the sector unexciting. The tighter mortgage assessment criteria wasobvious over the last few months based on developers' feedback and a sharp MoMdrop in Jan-12 mortgage loans approvals. Whilst residential demand interest isstill strong, loan approval periods have more than doubled. We also understandthat bank valuations of properties, even for new launches, have been toneddown, affecting buyers' effective margin of financing. Many are not getting thefull 90% margin of finance even for their 1st or 2nd  homes, given the current residential marginof finance of 80%-85% for new launches. Interestingly enough, developers underour coverage have lowered their 2012 sales growth targets from their previousquarter's guidance of 20%-60% to 5%-50% now. Those with more bullish targetshave 1) strong exposure to Johor (a market which we are very bullish on) withready launches like UEMLAND and SPSETIA; 2) overseas projects like Australia, whichare still enjoying favorable property dynamics like SPSETIA and 3) very highlyspecialised projects like UOAD, which are looking at potential en bloc sales oftheir MSC status buildings. Although it is too early to say we have seen theworse of the tighter banking liquidity given the limited data of just theJan-12 month (policy was effective 1-Jan-12), we note that Jan-12 residentialloans approval decline of 24% MOM was the sharpest is the last 12 months. Webelieve the situation will continue to persist until Bank Negara relaxes itsresponsible lending guidelines, although on the positive side, Bank Negara isunlikely to impose further tightening measures. Landbanking news flow is thin, which reinforces our view of a lacklustreyear. 

But strong earningsvisibility will limit further downside risks. We do observe more mass housingand Johor landbanking, as well as launches in the affordable housing segment.We expect this trend to continue throughout the year as developers lean theirearnings mix towards these products to realise sales targets. For now, theirsales targets look achievable as developers will be rolling out variations offinancing packages, while rebates are also here to stay. However, high volume mass housing sales also meansless attractive margins. We will be monitoring the mass market closely as tighterbanking liquidity seem to be hurting first home owners.  Ironically, nearly 50% of applicants for theMy First Home Scheme (100% financing for homes RM400,000/unit or less for firsthome buyers earning <RM3000/month). That said, we think the market haspriced in the bulk of the negative policy news and expect the sector to rangebound at its Fwd PBV mean (KLPRP CY12 PBV of 0.8x @ 6-year average). Also, mostof our developers (except for Hunza) have high unbilled sales providing strong earningsvisibility of 1-1.5 years. Developers with good dividends, like UOA (4.6% netyield) and MAHSING (4.7% net yield), should limit their share price weakness,provided they are still able to meet their sales targets.