The Edge reported that DBKL is imposing a freeze on new commercial spaces and luxury condominiums effective 1-Nov, while the duration of the freeze is unclear. The freeze is also applicable to variations made on building plans. However, developments like Bandar Malaysia and Tun Razak Exchange will not be affected as their master plans have already been approved. We were taken by surprise because the property market has stabilized while most developers’ pipeline of launches are now focused on townships or affordable housing supply as demand for commercial spaces and luxury condominiums has been very weak over the last few years. In our universe, UOADEV and MRCB have the highest exposure to developments in KL while other developers (e.g. ECOWLD, MAHSING, SPSETIA, SUNWAY) have moderate or some exposures. However, most of their projects have secured the necessary master plan approvals. We believe the measure is good for KL in the long run and may benefit developers with on-going commercial or luxury condominium projects. While we do not expect this measure to significantly affect developers under our coverage, we note that sentiment will be affected, particularly with potential OPR hikes (25-50 bps) over 2018, and thus, we expect some knee-jerk reactions to developers’ share prices over the next few days. However, note that many developers’ share prices have given back most of their YTD gains recently, which may offer some downside support soon. Maintain NEUTRAL pending 3QCY17 reporting season.

DBKL imposes freeze on new commercial spaces and luxury condominiums. Over the weekend, The Edge ran the story on Dewan Bandaraya Kuala Lumpur (DBKL) freezing new application approvals to build shopping centres, offices, service apartments and luxury condominiums (RM1m/unit and above) in Kuala Lumpur (KL) following a directive from the Cabinet - though the freeze came into effect on 1-Nov, its duration remains unclear. The Edge article also mentioned that the move follows a study by Bank Negara Malaysia (BNM) which indicates an excess of floor spaces in the four categories of buildings identified. However, considerations will be made for developments in new areas and those dispersed out of city centre. Developments like Bandar Malaysia and Tun Razak Exchange will not be affected as their master plans have already been approved. The duration of the freeze may last between 1- 3 years and is dependent on the market condition. The article highlights that the freeze is also applicable to variations made to building plans while plans submitted prior to the freeze must have also received planning permission by 1-Jan-2018.

A shocker! We were taken by surprise considering that the sector had experienced weakening transactions over 2015-16 while stabilizing in 2017 after a slew of both fiscal and monetary tightening measures since 2009. Additionally, most developers under our coverage are now focused on townships, affordable housing and/or integrated commercial developments with strong ‘urban affordable’ residential content rather than luxury condominiums or stand-alone commercial spaces. Notably, DBKL had imposed a freeze on new office supply shortly after the Asian Financial Crisis that lasted for a decade. This resulted in pent-up demand for Grade A offices back in 2006-09 as old spaces became less desirable.

Most master plan approvals obtained for our universe of developers. The measure is a negative for developers which are highly dependent on integrated commercial developments, particularly if they have not obtained their master plan approvals. KLbased developer, UOADEV, has the highest exposure to KL but has obtained most of its master plan approvals. MRCB also has very high exposure (40% of GDV) although we gather that most of the near-term projects have obtained approvals (we are seeking clarity on the Bukit Jalil land). Other developers with meaningful exposure (>5% of remaining GDV) in KL (ECOWLD, MAHSING, SPSETIA, SUNWAY) have secured master plan approvals and/or are targeting urban affordable housing products, which would leave them unaffected.

Enhancement in GDV for KL integrated commercial projects could be capped. The freeze also affects developers which seek to revise their master plans (e.g. higher plot ratios, changes in component mix) for integrated commercial developments, according to The Edge article. However, the risk is less as most of the revision to plans is more of obtaining a higher development density to enrich their GDVs. This may result in developers holding back launches if the GDV is not compelling enough or results in aggressive pricings – the latter obviously is not an ideal strategy in the current market environment and thus, we expect those projects would be held back.

Source: Kenanga Research - 20 Nov 2017