Maintain NEUTRAL as the sector still plagued with affordability, policy and oversupply issues. Despite the low valuations (in PBV terms), sector still lacks sustainable earnings visibility and growth to justify a re-rating in valuations. While sales numbers reported by developers have generally been good YTD, we believe the real test would be in FY22 without the housing ownership campaign (HOC) discounts. The high unsold units in circulation and declining HPI are indicators that developers will find it increasingly challenging to drive sales while maintaining margins.

Property sales by developers have been good. Despite the unexpected FMCO imposed in June, we note that all developers under our coverage are still inline to meet their internal sales target set out at the start of the year with exception to MRCB. In fact, ECOWLD and SUNWAY had already surpassed their initial sales guidance. ECOWLD’s strong sales of RM3.1b as of 10MFY22 is attributable to its huge online presence and appealing products while SUNWAY’s strong sales (of RM1.6b by 1HFY21) was mainly supported by the buoyant Singaporean market in which they have three developments (total GDV of RM2.5b).

However, we believe the real test would be when HOC ends in Dec 2021. Unless the HOC gets extended again, stamp duties (on MOT and loan agreement) which are currently waived would kick in. For properties valued at RM300k-RM1.0m, these duties would add on an additional cost of 2.1% to 2.9% (RM6.35k to RM28.5k) in cash. Taking cue from car sales trend which came off substantially post GST tax holidays back in Jun 2018 to Aug 2018, we opined that most home buyers would likely seize the opportunity to purchase properties by year-end and property sales would likely come off next year.

Generally, property development margins YTD have been rather stable. This is attributable to cost controls and efforts to pivot into digital marketing which substantially cut sales and marketing costs while sales remained healthy. Meanwhile, the developers which saw deteriorated margins were MRCB, UOADEV and UEMS which could not reduce cost as quickly as the drop in revenue. This is mainly due to: (i) their lack of fresh sales, (ii) low unbilled sales at the start of the period, and (iii) less nimble cost structure.

Unsold properties at its highest in 1HFY21. Based on data from NAPIC, we believe the oversupply issue begun in 2015 when serviced residences started to flood the market in masses despite cooling measures imposed starting 2014. Overhang1 units for serviced residences grew at a whopping CAGR rate of 93% since 2015 till 1HCY21 currently (refer table below highlighted in orange). We opine that this issue which is pressuring house prices is unlikely to abate in the near term given the large amount of overhang and unsold-under-construction2 units still in circulation today (refer table below highlighted in Green). In fact, based on latest 2QCY21 data tabulated, unsold units in circulation have increased further and are currently at an all-time high at 172k units.

Referring to the breakdown of unsold units tabled above, Johor remains the state with highest unsold units at 43k. That said, unsold units in circulation in Johor have pretty much plateaued at around this range since 2017 as developers have been prudent with launches amidst the huge influx of units in the prior years led by Chinese developers.

What’s more interesting to note would be the growth in unsold units at KL and Selangor. Since 2015, the unsold units in KL have tripled while Selangor’s have more than doubled. While some other states (Perak, Penang, Negeri Sembilan, Sabah) have also shown significant growth in unsold units, note that KL and Selangor come from a much higher base. Also being the two states with the highest average home prices at RM745k and RM482k per unit (vs. Malaysia’s average of RM427k/unit), this is possibly the main reason why the house price index (HPI) in KL and Selangor have stagnated (highlighted in orange in the table next page). In fact, KL was the only area which saw its HPI deteriorating since 2016.

Filtering the trend of growing unsold KL and Selangor units into our coverage of developers, we opined that UEMS, MAHSING, UOADEV, MRCB and SUNWAY which have high exposure to high-rise developments in KL and Selangor would find it increasingly more challenging to drive sales amidst mounting competition from unsold units and new launches. We believe in order to drive sales, development margins will have to be sacrificed either through higher discounts or through better product offerings (i.e. more facilities, freebies or higher degree of furnishing).

Unprecedented negative YoY growth in HPI. 2QCY21 marks the first time HPI has dipped into a negative territory (-1.2%; refer graph below) on an annual basis. While this could be partially attributed to the pandemic, we think the underlying HPI trend has been heading towards negative growth all along and the pandemic just accelerated it. We believe such trend is mainly due to oversupply and affordability issues.

Maintain Neutral. Overall, the sector still remains fundamentally challenged from an affordability, policy and oversupply standpoint. Despite the low valuations (in PBV terms), the entire sector still lacks sustainable earnings visibility and growth to justify a re-rating.

Source: Kenanga Research - 4 Oct 2021