We maintain our NEUTRAL stance on the property sector due to the persistent oversupply and home ownership now being even more out of reach given the elevated interest rates, sustained high inflation and the introduction of targeted fuel subsidy that may erode spending power of certain consumer groups. While most developers have been able to register decent sales, this is achieved via very selective and measured launches and by ensuring not overcrowding the market with the new offerings. Contrary to what stock investors wish to believe, few foreigners take interest in Johor properties. Our sector top pick is SUNWAY (OP; TP: RM2.27) given its diversified businesses which provide a cushion against any singular industry downturn and its growing healthcare business.

Improving but challenges still remain. We remain cautious on the sector’s outlook given the weakened consumer sentiment due to high inflation and elevated interest rates. Not helping either is the imminent introduction of targeted fuel subsidy which may deny subsidised fuel access to part of the M40 group, eroding their spending power, particularly on big ticket items such as properties. That said, a growing focus on affordable units (deemed to be up to RM650k by certain developers) may help to quell new housing requirements given the current headwinds. NAPIC’s housing price index (HPI) appears to be reflecting this given its first QoQ decline in 2QCY23 at 1.6% since 3QCY21 which was when the easing of pandemic lockdown commenced.

On the other hand, the banking industry loans approval rate for property based on BNM’s recent July 2023 release reflected a slight increase for the month at 44.1% (Dec 2022: 43.5%). We reckon macro and income conditions could be less worrying as economic recovery is somewhat positive and hence more palatable for the banks’ appetite. That said, present readings are still far from the peak of 50% during the industry’s upcycle between 2011-2014. We opine approval rates may continue to remain stable at mid-40% given the lack of visible near-term investment returns from property assets. While we wait for BNM’s 1HCY23 Financial Stability Review for the national household debt-to-GDP statistics, 2022’s closing of 81% as opposed to the pre-pandemic high of 88% may indicate lower confidence in borrowing amongst consumers which could linger.

Overhang subsiding but starkly present. According to NAPIC, there has been a decrease in the number of units in circulation (including overhang and unsold under construction units) at 133k units in 1HCY23 as compared to 2HCY23’s 142k units. Most overhang units in the residential and serviced apartment categories fall within the price range of RM500K and above, accounting for 47.8% and 57.7% of their respective totals. Overall, condominiums/apartments comprise of 58.3% of total overhang units and 50.5% of total unsold under construction residential units.

We note that Kuala Lumpur, Johor and Selangor markets are where these issues are a major concern but are also the regions which are most likely to see new development launches. Amidst the excess in inventory, developers may need to uncover strong value propositions to strengthen their developments take-up rate to ensure the projects’ viability. In terms of developers with exposure to both these regions and concentration to high-rise, MAHSING (MP; TP: RM0.80) and SUNWAY are likely suspects but they enjoy a well-established presence there.

We note that the Johor market has gained a fair amount of attention recently, fueled by improved sentiment on the back of the Rapid-Transit Link’s progress, connecting Johor Bahru with Singapore. According to Ho Chin Soon Research, buyers still mostly consist of either locals or Malaysians working in Singapore. This concurs with our channel checks with various lending institutions operating there that only a very small proportion of Singaporeans has vested interest in Johor real estate, likely due to its narrowing price points as compared to property listings in Kuala Lumpur. While certain developers have not been actively marketing to Singaporeans for prospective buyers, they may be an eventual target should the appetite from locals begin to peak.

Source: Kenanga Research - 6 Oct 2023