Maintain OVERWEIGHT. Since valuations are already at a low for large cap developers, we prefer to maintain OVERWEIGHT on the sector, as we believe rebounds will be quick when news-flows turn more positive. We believe house prices will be maintained and property demand will resume once the ‘wait-and-see’ game ends. Property developers’ share price cycles also lean towards a more positive outlook, particularly as property sales as a proportion of GDP is already at a down-cycle. Overall, developers under our coverage are enjoying healthy net gearing levels of between net cash position (UOA, IJMLAND, MATRIX) to 0.4x net gearing, which is below our ceiling levels of 0.5x-0.6x. The exception is MAHSING with a slightly above 0.5x net gearing by FY14E although it is still at an acceptable level. All the developers are set to roll-out their affordable housing/industrial property projects next year. Notably, for developers under our coverage, more than 50% of their remaining respective GDVs are priced below RM1m/unit while 20%-30% are below RM500k/unit. We believe that 1Q1CY4 will remain quiet as the market would like to see confirmation of more affordable housing/industrial property project roll-outs, along with healthy take-up rates. We do take the view that sentiments may improve in 2QCY14-3QCY14 as we believe developers will surprise on the upside. New CALLs/TPs are; UEMS (OP; TP: RM2.76), SUNWAY (OP; TP: RM3.08), IJMLAND (OP; TP: RM3.15), MAHSING (OP; TP: RM2.56), UOA (MP; TP: RM2.10), SPSETIA (MP; TP: RM3.25), CRESCENDO (OP: TP: RM4.00), HUAYANG (OP; TP: RM2.33) and MATRIX (OP; TP: RM4.80).

FY14 will be volatile. Property stocks' cycles are getting shorter over last few years and of late, the uptrend has been beaten down severely. Once the market has adjusted to the cooling measures and when people realize that property prices will not come-off, demand will return and will be largely driven by the need to hedge against future cost-push factors (e.g. subsidy rationalization, GST). While we admit that the pool of buyers may not be as vast as previous years given Bank Negara restrictions, we believe demand will be concentrated amongst larger developers with solid reputation, branding and ability to create value.

1Q14 will be challenging. We believe 1Q14 will remains challenging for the sector as investors are likely to stay on the sideline watching for indications of take-up rates in response to the tightening measures put in place (e.g. transparency measures, absence of DIBS). It will take some time for the market to digest these measures. Property buyers may adopt a ‘wait-and-see’ attitude while we expect developers to keep a relatively low profile during the quarter given all the tough measures put in place. Developers may push launches towards 2Q14 to 2H14 onwards, which could create a ‘pent-up’ demand scenario as seen post-2008 Global Financial Crisis (GFC). This may mean that towards end 1Q14, the sector may start to heat up again. However, as the sector has been heavily sold down with share prices and valuations bottoming-out, share prices might be range-bound pending positive news flow.

Expecting a better 2Q14-3Q14. As mentioned earlier, we expect the “pent-up” demand scenario to materialize after the market has fully absorbed the negatives. Strong news flows include new listings coming on stream, which should lend strength to valuations; Medini Iskandar, Eco World (RTO of Focal Aims), IOI Properties and IWH. To top it off, there could be more developments of infrastructure projects, including awards for MRT Line 2 (Radial Line), report outcome of feasibility studies of the High-Speed Rail, MRT Line 3 (Circle Line) or the Johor-Singapore RTS (end 2014). We also understand that towards 2QCY14, there could be more news-flow on PETRONAS RAPID, which should be good for the Johor property market.

Focus on affordable and mass housing projects. Lending rates have declined by c. 40% since 2000 with longer tenures up to 30 years, making it conducive and affordable for buyers to buy properties. Admittedly, affordability has become an issue over the last few years. One of the reasons is that developers were launching more expensive properties prices above RM1m/unit. However, over the last 12-18 months, more developers are skewing their launches towards more digestible products by launching smaller built-ups to overcoming increasing replacement costs or launching landed residentials in less developed suburban areas (e.g. Bangi, Semenyih, Canal City areas, mainland Penang, Pasir Gudang/Senai/Tebrau@Johor). We believe developers will move towards increasing volume sales through more affordable units to clock-in sales numbers. If that is the case, overall affordability may improve.

KEY POINTS

The aftermath of Budget-2014. KLPRP outperformed the FBKLCI this year even after the sell-downs seen in 4QCY13. After the Fitch Ratings’ downgrade of Malaysia’s outlook to Negative from Stable and after the Budget-2014 announcement (Oct-13), property stocks have taken quite a beating. Post Budget-2014 announcement, the KLPRP index settled at YTD gain of 22% (from the YTD Post-GE peak gain of 44%) vs. the FBMKLCI YTD gains of 10%. Large cap (>RM1b market cap) developers gained 21% YTD vs. its peak of 52% while mid-cap (between RM500m-RM1b market cap) developers recorded 46% YTD gains vs. its peak of 56%. Clearly, the sector has done well in terms of share price performance, although property shares prices had an extremely short upcycle during the year. Investors are shying away from the sector on concerns that demand and property prices could weaken in the future. Developers have also turned cautious and generally indicating that everyone is taking a ‘waitand-see’ approach.                  

How are property-related NPLs doing? We view BNM’s introduction of tightening measures (e.g. cessation of DIBS, transparency measures for residential loans) during Budget-2014 announcement as a precautionary measure. This was in addition to the 70% LTV cap on third residential loans. In general, purchase of residential and non-residential property remains at a low level since 2002. Admittedly, NPLs has risen slightly for residentials above RM250k/unit although we opine that it is not at an alarming level. Nonetheless, it is healthy to take pre-emptive measures as a result of rising household debt levels over the last few years. Positively, we believe residential or non-residential property loans are not the main culprit of rising NPLs as it is on a declining trend when their respective NPLs are taken as a proportion of total banking NPLs.

Vigilant banking system. We believe our banking system remains sound as banks are strict in exercising the 70% LTV cap on third residential loans while ensuring repayment capabilities of property-related loans. An assessment of the loans applied data running up to Budget-2014 announcement showed that a clear trend as it still registered a 24% YoY growth for 10MCY13. However, loans approved have been flat at 0% YoY for the same period, implying that banks have been vigilant in controlling lending. Average lending rates also appeared to have levelled-off. Nonetheless, most of our developers under our coverage have been seeing record high sales to date, which leads us to believe that lending has been skewed towards new launches.

Supply absorption rates have improved the most for Johor. We have been monitoring overall residential property absorption rates (total supply / total units transacted). Out of the 3 major property zones, (i) Johor has shown the most improvement and its absorption rate remains below its 10-year average, (ii) Klang Valley’s absorption rate has weakened and is slightly above its 10-yr average, (iii) Penang’s absorption rate has also weakened and is also above its 10-year average. In general, the market’s appetite for property, particularly in Johor, remains relatively healthy. In the case of Penang, the state government has already implemented measures (further details below) to reign in speculative activities. Overall, absorption rates may weaken in view of Budget-2014 measures, although we believe that developers will continue to get a bigger slice of the pie.

Cost push inflation leads to higher prices. We strongly opine that the reason for rising property prices has been brought about by increasing replacement costs as the impact of subsidy removals have been evident over the last few years. This will eventually mean that secondary properties will also follow suit, which may motivate more buyers to buy and hold properties over a longer term, meaning that overall supply will level off. More so the case with the current measures put in place during Budget- 2014 announcements (e.g. higher RPGTs).

What happens when people realize that prices will NOT drop? Our studies of countries (e.g. Australia, New Zealand, Canada) that have implemented GST have seen new house prices increase after GST implementation. As a result, many would try to hedge against inflation before the implementation of GST. In the Malaysian context, this will be more urgent, as we will undergo a series of subsidy rationalization at the same time. Most developers are unwilling to absorb margin hits and will likely pass on the costs, as they have done so in the past. Another thing worthwhile noting is while a lot of buyers adopt a ‘wait and see’ stance as they expect prices to fall significantly, they will likely rush to buy properties once they realize prices will likely hold up – this was seen post 2008’s Global Financial Crisis (GFC).

Why we think developers sales will remain healthy… Based on our analysis, developers’ market share (Malaysia only sales) of total property demand has been on an increasing trend. Over the last few years, developers under our coverage have been seeing record high sales to date, which has led us to believe that lending has been skewed towards new launches. One could attribute this to better financing schemes (e.g. DIBS, rebates) which would explain the preferences to buy primary properties over secondary ones. This has caused a divergence in the primary and secondary market. Such incentives will no longer exist by 1st Jan 2014 i.e. DIBS, while transparency measures have already kicked-in.                                  

…as long as it is the ‘right product’ in the ‘right location’. While we believe these financing schemes are one of the attributing factors to strong developers sales in the past, we also believe there are other equivalent drivers; (i) developers are offering more ‘security conscious’ and lifestyle driven developments, (ii) natural up-graders (iii) parents assisting children with property purchases or trying to buy ahead for their children amidst rising replacement costs, (iv) increasing need to hedge against inflation, especially amidst subsidy rationalization and lack of investment alternatives, (v) multi-generation homes are declining as younger families or couples seek new homes as the number of households are increasing, (vi) the need to relocate near areas with high connectivity (e.g. LRT, MRT), (vii) lending rate remains at a record low. Although DIBS have been removed, we believe that as long as the launches are in the right location and they are of the ‘right product’, sales will continue to be healthy; examples are D’sara Sentral, Rimbayu, Southville City Savanna, some portions of Setia Eco Hill terraces, which have achieved >70% bookings or take-up rates within weeks of previews or launching. One of the key reasons is the need for affordable housings or landed residentials which many developers under our coverage are offering. Another major reason is that those who buy from new launches tend to enjoy a greater upside by taking on the risk of holding the property during the construction period. This is more so the case for buyers to lean towards reputable developers. It is tough to conclude if the trend will continue but we reckon it will.

The next cycle. Our in-house Economist estimates CY13, CY14, and CY15 GDP growths of 5.0%, 5.3% and 5.5%, respectively. Hence, we expect that developers will still continue to clock in healthy sales growth assuming: (i) property sales’ value as a proportion of nominal GDP remains at current levels, which we deem is already at a down-cycle, (ii) GDP is still registering healthy growth rates, (iii) developers’ annual sales remain at current proportion of Malaysia sales. Since 2006, the KLPRP has enjoyed a 2-year mini-cycle of strong gains, outperformed the FBMKLCI while commanding cumulative gains of 39%-82% in each mini-cycle. If this trend persists, theoretically, 2014 should be a year where the KLPRP clocks in another set of strong gains and outperforms the FBMKLCI.

What is the market waiting for? With the negative sentiment surrounding the media on Budget-2014 measures, the market is waiting for confirmation of take-up rates in 1Q14. Larger cap developers are skewing their future launches towards the affordable / mass market arena while the mid-cap developers under our coverage are largely concentrated in industrial and mass housing projects. However, some did mention they may push forward launches towards 2QCY14 to 2HCY14 to ascertain how buyers will continue to react to the new tightening measures put in place. This may create some “pent-up” demand scenarios, particularly as more subsidy rationalization takes place next year, i.e. house prices are unlikely to come-off.

Will house prices drop? We think not. In Singapore, house price movements have been volatile in the past. Singapore had allowed deferred payment schemes, which is not to be confused with the Malaysian DIBS, and had more exposure to foreign buyers. This is vastly different from the Malaysian market as DIBS still requires buyers to undertake an underlying loan while Malaysia has had significantly lower exposures to foreign buyers, with the exception of a few places in Johor (e.g. Medini, Puteri Harbour). As a result, we believe that house prices will likely hold up, if not consolidate at current levels, especially in light of cost-push factors. We also take the view that if prices consolidate and stabilize, it will also help affordability catch-up with prices.

Focus on affordable and mass housing projects. Lending rates have declined by c. 40% since 2000 with longer tenures up to 30 years, making it conducive and affordable for buyers to buy properties. Admittedly, affordability has become an issue over the last few years. One of the reasons is that developers were launching more expensive properties prices above RM1m/unit. However, over the last 12-18 months, more developers are skewing their launches towards more digestible products by launching smaller built-ups to overcoming increasing replacement costs or launching landed residentials in less developed suburban areas (e.g. Bangi, Semenyih, Canal City areas, mainland Penang, Pasir Gudang/Senai/Tebrau@Johor). We believe developers will move towards increasing volume sales through more affordable units to clock-in sales numbers. If that is the case, overall affordability may improve.

Developers have a war chest of affordable housing products. Our checks indicate that larger developers like IJMLAND, SPSETIA, MAHSING, UEMSUNRISE, UOA and SUNWAY are rolling-out: (i) landed residentials to cater to both foreigners and local market, (ii) affordable housing products (priced between RM400-700k/unit), and/or (iii) those near to connectivity plays (e.g. MRT, LRT) to ensure that they meet their sales targets. Notably, large cap developers under our coverage have at least 50% of their remaining GDV priced below RM1m/unit while many of them have allocated between 20%-30% of their remaining GDV for products priced below RM500k/unit. While most large cap developers have not officially released their sales target growth for CY14, many believe they can achieve a 10%-20% YoY growth in Malaysian sales; the exceptions with downside

biases are (i) SPSETIA as it has hit a high-base effect with its local sales while it lacks other overseas drivers besides Battersea, London, (ii) UOA which expects only flat sales as they tend to be more “defensive” but given their strong net cash position, they are likely to provide 6.5% dividend yields, (iii) SUNWAY is conservatively guiding flat sales growth in FY14 as FY13 came in stronger than expect; however, their target launches in FY14 is higher by 28% YoY, meaning there could be more upsides to FY14 sales, pending their assessment on market conditions. Developers are also prepared to push up prices in view of future cost increases and are unlikely to absorb it i.e. low likelihoods of margin hits. As for the mid-cap developers that we cover, most of them are targeting the affordable housing market and/industrials. Their remaining GDVs (in terms of residential) are mainly priced between RM300k-RM800k/unit. Demand should be resilient in this arena so CY14 sales growth should also be healthy at 10%-20% YoY. We continue to like those with large affordable housing and/or industrial properties exposure like HUAYANG, MATRIX and CRESCENDO for their sustainable demand and strong CY14 net dividend yields of 4.5%-8.0%.

Large cap developers are trading closer to trough levels. Currently, large cap developers’ valuations are approaching or at trough valuations at -1.0SD to -1.5SD for Fwd PERs and -1.0SD to -2.0SD for Fwd PBVs, except for SUNWAY and UOA which are trading slightly below to average levels. In terms of discount rates to FD RNAVs, current prices imply that large cap developers are trading between troughs to average levels. So any positive news-flow will see a fast rebound in the sector. Mid cap developers valuations hold-up well. Mid cap developers Fwd PBV and Fwd PER valuations are holding-up at average to near peak levels having being re-rated by the popularity of affordable housing and/or industrial plays while these stocks have also seen increase in institutionalized holdings. Additionally, the Fwd dividend yields range between 5.9%-6.3% providing a defensive quality to these stocks.

OUR TAKE

Expect developers to rebound on more news-flow and new listings. We expect developers’ valuations to strengthen, particularly when many large cap developers are trading close to trough valuations, when new listings take-place in FY14 lending strength to valuations; IOI Properties (early CY14), Eco World (RTO of Focal Aims by 1Q to 2Q CY14), Medini Iskandar (mid to 2H of 2014) and potentially IWH. To top it off, there could be more talk of infrastructure projects such as awards of MRT Line 2 (Radial Line), report of feasibility studies of the High-Speed Rail, MRT Line 3 (Circle Line) or the Johor-Singapore RTS (end 2014).

Maintain OVERWEIGHT. Since valuations are already at a low for large cap developers, we prefer to maintain OVERWEIGHT on the sector, as we believe rebounds will be quick when news-flows become more positive. We believe house prices will maintain and property demand will resume once the ‘wait-and-see’ game ends. The developers’ share price cycle also leans towards a more positive outlook, particularly as property sales as a proportion of GDP is already at a down-cycle. Overall, developers under our coverage are enjoying healthy net gearing levels of between net cash position (UOA, IJMLAND, MATRIX) to 0.4x net gearing, which is below our ceiling levels of 0.5x-0.6x. The exception is MAHSING at slightly above 0.5x net gearing by FY14E although it is still at acceptable levels. All the developers are set to roll-out their affordable housing/industrial property projects next year. Notably, for developers under our coverage, more than 50% of their remaining respective GDVs are priced below RM1m/unit while 20%-30% are below RM500k/unit. We believe that 1QCY14 will remain quiet as the market would like to see a confirmation of more affordable housing/industrial property project roll-outs, along with healthy take-up rates. We do take the view that sentiments may improve in 2QCY14-3QCY14 and we believe developers will surprise on the upside.

CALLs/TPs. We have already trimmed our large cap developers TPs by widening their discount rates during the last result season to take into account the negative sentiment and potential threats of Budget-2014 measures. Maintain TPs/CALLs on the following; UEMS (OP; TP: RM2.76), SUNWAY (OP; TP: RM3.08), IJMLAND (OP; TP: RM3.15), MAHSING (OP; TP: RM2.56), UOA (MP; TP: RM2.10) and SPSETIA (MP; TP: RM3.25). We continue to like the mid-cap developers under our coverage for their low sales base effect, strong exposure to mass housing and/or industrial properties and decent dividend yields. We maintain our TPs/CALL for CRESCENDO (OP: TP: RM4.00) and MATRIX (OP; TP: RM4.80). However, while we maintain HUAYANG’s CALL, we have trimmed its TP (i.e. HUAYANG (OP; TP: RM2.33) given that 2-yr Fwd average net dividend yields of 5.5 % are more comparable to CRESCENDO (5.0%) but less attractive than MATRIX (7.3%).

RISKS

Take-up rate risks. So far, new launches which focused on affordable housings and landed residentials have held-up well, albeit being sold on a ‘plain vanilla’ basis. This reiterates our earlier views. We do admit that developers will have to work harder to close sales as the game has turned into a volume game while financing schemes (e.g. DIBS) are eliminated. If take-ups are weaker, particularly for affordable housing, we may look to downgrade the sector’s call as property share prices may not move at all, albeit being at near or at trough levels.

More QE tapering. If there is more tapering of the US QEs in Mar-Apr 2014 which leads to weaker Ringgit, there should not be any material impact on developers’ earnings which are largely localized; the exception being SPSETIA which has high overseas exposure which will mean higher profits. In terms of share price, there could be some short-term knee-jerk reaction, being a high beta sector. This could be a good opportunity to collect on weakness in view of the positives mentioned earlier.

Interest rate hike risk. Our in-house Economist believes that the likelihood of interest rate hikes in 2014 is low for the meantime, citing that BNM will have to balance between higher consumer spending and capital outflows vs. greater inflationary factors coming in post GST implementation in Apr-2015, which the latter could affect overall economic demand. If so, we believe that property demand for affordable housing or genuine demand will remain intact, and we take the view that developers will continue to take a bigger bite of the overall pie.

We may turn negative towards 4QCY14 to early 2015. This is in view of more potential tightening measures arising from Budget-2014, especially if house prices continue to rise. Additionally, the onset of GST in Apr-15 will create volatility given implementation issues while primary market prices’ will become significantly higher than secondary ones compared to the current situation. This will affect all developers across the board.

JOHOR

Tightening measures unlikely to slow demand for too long. The Johor state government imposes a 2% levy on foreigners who buy properties in the state effective from 1st May 2014. We do not think this will deter foreign demand and the measure is considered less severe than initial expectations of the 4%-5% levy and will like be lower than Penang’s proposed 3% levy on foreign property buyers (still being considered). The current levy for foreigners in Johor is RM10k/unit as compared to a 2% levy on a property worth RM2m which is only RM40k in absolute terms; we believe foreigners coming from stronger FOREX bases (e.g. SGD, USD) will not find this overly detrimental. Additionally, we do not see the Budget-2014 measures (e.g. higher RPGT, RM1m/unit floor prices for foreigners) to have affected landed residentials. As an indication, Emerald Bay (next to Puteri Harbour) Canal Homes or landed villas of > 3000sf built-ups are priced between RM3-4m/unit and has been extremely well received post Budget-2014 announcements. Emerald Bay is a 60:40 JV between BRDB and UEMSUNRISE  hich should be a booster to the latter’s associate profits. While it is natural for everyone to adopt a ‘wait-and-see’ attitude in anticipation of prices cooling off, we believe demand will resume in the next 3-6 months once realizations sets in that house prices are unlikely to fall in light of subsidy rationalization. We believe Johor’s properties’ market will continue benefiting from: (i) Singaporeans which will be anticipating further news on the Johor-Singapore RTS while they continue to face significantly steeper affordability issues on the island and (ii) Malaysians working in Singapore who generally enjoy greater spending power than Malaysian residents.

Special status for Medini. We understand that IRDA is in the midst of seeking RPGT exemptions for individual buyers of properties in Medini. As it is, Medini, being a special zone for foreign investment is likely to be exempted from the RM1m/unit floor prices for foreign buyers. This will be beneficial for MAHSING’s Meridin@Medini project @ Phase 2 and SUNWAY’s Medini project (Phase 1 – service apartments, offices, retail).

Could there be more measures? The Johor state government was also mulling over another measure where foreigners would no longer be allowed to buy properties in the secondary market from locals. Although this has not been tabled yet, we view this as unlikely given the multiple measures already put in place by Budget-2014. Separately, the Johor state has changed its weekends for the public sector (government offices, public schools) to Fri-Sat from Sat-Sun. Private sectors (including companies, banks, private/international schools) have been given the option and will likely to continue operating with the typical Sat-Sun weekend days. While there maybe some operational hiccups, we believe businesses will adjust accordingly.

Johor developers being threatened by influx of China-based developers? While Johor has shown stellar sales over the last few quarters, property prices have risen sharply over a short period of time. Country Garden Danga Bay has successfully kicked-off its project with the highest number of units launched at one go (c. 8000 units out of c.10,000 units) and have since achieved 70-75% take-up. We also gather that a substantial amount of buyers are from China, followed by Singaporeans and locals. Recently, another China-based developer, Guangzhou R&F Properties has acquired 46.94ha at Danga Bay for RM4.5b or RM891psf, while shortly after, a China-link developer based in Singapore formed a JV with Iskandar Waterfront to buy 15ha land from the latter at RM1.6b or RM998psf. These are record pricings for Danga Bay or Johor for that matter and the prices are 2.0-2.0x that of the transacted price at Danga Bay by Tropicana Corporation (back in 2011) and about 3x the price paid in Puteri Harbour (back in Apr-13). We understand one of the reasons for the high land price is due to ‘very high plot ratios’ although details are not disclosed. Coupled with Country Garden’s units, we are concerned that Danga Bay may face future oversupply in the area, particularly as the area has targeted a lot of foreign buyers. This could be mitigated if there are new economic drivers brought into Danga Bay and since the area has attracted a lot of interest of late, this could potentially hint at new drivers. Nonetheless, we believe launches have been more paced out smoothly in Nusajaya (e.g. UEMSUNRISE projects) and have a lot of non-residential components to drive activities (e.g. Educity, industrial parks, Legoland, Puteri Harbour).

Demand for landed residentials will remain resilient. We reckon landed residentials will remain resilient as it will continue to appeal to Singaporeans or Malaysians working in Singapore. Notably, most landed residentials or townships have a 20%-30% cap (depending on price range) on foreign buyers while we understand most of these are taken-up by genuine buyers. For UEMSUNRISE, their major Nusajaya drivers in FY14 will be largely landed residentials; D’Estuary (GDV: RM4.8b), Residential South (GDV: RM1.9b) and East Ledang (GDV: RM1.1b). These will be priced at a minimum of RM1m/unit which will be targeted at foreigners. Mass or affordable housing market offerings in FY14 will be driven by Serene Hills, Bangi (GDV: RM2.7b) and ongoing Nusajaya landed residentials (Nusa Idaman, Nusa Bayu of combined GDV of RM0.7b). Notably, they will be replicating Nusa Idaman (mid-high end landed residentials) and Nusa Bayu (mass market landed residentials) over 500ac in Gerbang Nusajaya and we estimate that a GDV of RM3b. This should fare well once Ascendas kicks-offs their industrial park (Phase 1), which has already started its marketing activities.

More economic drivers to come. We understand from our Oil & Gas team that we could be seeing more of PETRONAS RAPID announcements by 1H14 which should provide a revival play for Johor. UEMSUNRISE has also hinted that here will be more strategic investors coming into Nusajaya soon although details were not made known. So far, the Education contents (e.g. NuMed), Kuok Brothers, Peter Lim’s Motorcity, China Mall MoU, Legoland and Ascendas’ upcoming industrial parks are the key names that have surfaced over the last couple of years. The lures of Nusajaya are its land road connectivity and ecosystem and this will be further enhanced by its tie-ups with TM, IIB, Cisco and Centios, which will turn Nusajaya into a Smart City (starting with 100Mbps internet connectivity). Ascendas has started marketing their Phase 1 of their industrial park in Gerbang Nusajaya with targeted launch in early 1Q14. Medini Mall Phase 2 (next to Phase 1 which connects to Legoland) will start works next year and will span 1.5m sf GFA. The mall will be positioned as an ‘activities’ (e.g. bowling, rock climbing, etc) mall with high-street brands to target families locally and from Singapore.

We think Johor will continue to be a major growth driver of developers’ sales, particularly those with sizeable exposures. Over the last two years, those under our coverage have seen their Johor sales growth outpacing that of Klang Valley for a few reasons: (i) higher demand for gated & guarded, security driven housing schemes, (ii) lifestyle concepts, (iii) increasing buy-ins from Malaysians working in Singapore and foreigners, especially Singaporeans due to strong G2G relationship. Additionally, sizeable landbanking has been extremely active in Johor over the last two years which is an indicator of where growth will be most evident.

PENANG

Penang measures targets both the affordable... The Penang government is implementing new housing rules effective 1 February 2014 that amongst other, impose 5-years sales restriction on affordable housing (<RM400k/unit) on the island and <RM250k/unit in Seberang Prai) and 10-year sales restriction for public housing (<RM72k/unit) subject to exemptions for appeal in certain cases on top of the recent measures on foreign buyers. We believe this will not affect most of the developers under our coverage. The state government is also implementing a 2% levy on citizens who are selling their properties above the affordable range within 3 years from the date of SPA signed from 1 Feb 2014. In addition to the new RPGT schedule put in place, this will likely deter speculators but will not have any detrimental effect to genuine buyers looking for a home to stay. If anything, this may further restrict future supply as the holding period will be longer and may push prices up again as sellers price in this levy. In our view, these measures will unlikely affect the developers under our coverage which are selling properties above RM400k/unit in Penang Island and above RM250k/unit in Seberang Perai (e.g. IJMLAND, SPSETIA, MAHSING).

… and foreign buyers. As it is, the floor prices for foreign buyers are now RM1m/unit but Penang has added an additional measure where foreigners can only buy landed properties on the island if it exceeds RM2m/unit. All purchases by foreigners will be subjected to a 3% levy on transacted price (effective 1 Feb 2014 onwards). Currently, 20%-30% of buyers of new launches (in some cases, up to 40%-50% for very high-end projects) are foreigners which are mainly from Singapore and Hong Kong. We understand that most foreigners tend to purchase properties above RM1m/unit so the floor prices will not be a major deterrent. While the 3% levy is not hefty sum for foreigners, Johor’s 2% levy on foreign property buyers is slightly more attractive. Malaysia’s property value is also generally on the cheaper end of the spectrum vis-à-vis its South East Asian neighbours (e.g. Singapore, Hong Kong). We believe foreign demand for Penang’s high-end properties are mainly for the location (e.g. seafronts) and those buying such properties will not see this as a major deterrent as they are buying for longer-term periods. Under our coverage, MAHSING, IJMLAND and SPSETIA have minimal exposure (<5%) of total GDV to this market.

Source: Kenanga