We recently visited Johor to investigate the tourism angle given the weaker Ringgit and the influx of interest from China with regards to the massive Forest City project by Country Garden. Projects visited in our study trip included Forest City, Sunway Iskandar and E&O Avira Iskandar Malaysia and selected malls like KSL City Mall, AlSalam REIT’s Komtar JBCC and Genting Plantations’ Johor Premium Outlet. It has become apparent that Johor can no longer be looked as a whole but rather by pockets of ‘hot spots’. With the upcoming development of the High-Speed-Rail (HSR) which will bring about the Johor-Singapore Rail Transit System (RTS), it appears that the longer term growth story of Johor may still be in play. While most of the local developers are saying that sales have been soft, it appears this is not a case across the board. Forest City by Country Garden has garnered a lot of attention from the Chinese and their aggressive sales methods have outpaced most of our local boys. It was reported by Oriental Daily that Forest City has engaged 32 travel agencies in Singapore and Malaysia with some agencies organising an average of 10 group visits a month per agency, which is phenomenal in terms of traffic flow. Meanwhile, the 9,000-units Country Garden@Danga Bay is near completion and has achieved 90% take-up rate. We believe that Johor’s property market maybe a two-tiered one as local demand remains relatively soft while projects like Forest City are seeing overwhelming interests from the Chinese. Even if developers focus on landed residential, we note that local demand is still for the affordable housing segment than the high-end ones. Buyers have become more selective and developers will have to work harder to differentiate themselves. Note that Johor HPI performance remains the weakest amongst the major states. In terms of mall performance, we believe the high incoming supply of new malls over the next 3-4 years may add further pressure on occupancy rate unless tourist traffic picks up significantly. Maintain NEUTRAL on Developers.

Johor Residential Market Overview

House prices in Johor is growing at a more moderate pace at 5.5% YoY at 3Q16 vs. its 10-year average of 7.4% and a peak of 26% back in 2013. 9M16 (3Q16) residential transacted value has declined by 11% YoY (-20% YoY) to RM6.3b while units transacted is also down by 18% YoY (-30% YoY) to 19,304 units. In terms of residential unsold units (completed), Johor’s have been easing since mid-2014 and are now currently at 13.7k units. Contrary to perception, we note that 2-3 storey terraces are the ones with the highest overhang rates while condos are relatively lower. In terms of incoming supply and planned supply, landed residential appear to have a higher volume vs. condominiums.

Meanwhile, Johor residential annual absorption rate of incoming supply (transacted units / incoming supply) has deteriorated to 19% vs. its 10-year average of 31% and is slightly worse off to Malaysia’s overall absorption rate of 24%*. Johor’s absorption rate of overall supply (existing supply and incoming supply) is at 3.0% vs. its 10-year average of 3.7% and Malaysia’s 3.5%*. The trend is in line with overall Malaysia but it is clear Johor is showing greater weakness. Nonetheless, the popularity of future supply of landed residential stems from the fact that absorption rate is still relatively healthier than condos. We reckon most local based developers will continue emphasising on landed residential products, especially as the China-based developers are focusing mainly on high-rises. *Based on annualized 9M16 data.

Source: Kenanga Research - 17 Feb 2017