We maintain our NEUTRAL stance, remaining cautious on the property sector due to oversupply, high household debt, elevated interest rates and weakened consumer sentiment, which could be further dampened by subsidy rationalisation. While there has been significant interest from equity investors (and not property investors) in the property market in Johor due to the proposed Special Economic Zone (SEZ) in Forest City and improved connectivity with Singapore via the Johor Bahru-Singapore Rapid Transit System (RTS), they will only be operational in CY25 and CY26, respectively, under a bluesky scenario. Nonetheless, we see a bright spot in the affordable housing segment. Our sector top picks are MAHSING (OP; TP: RM1.00) and MKH (OP; TP: RM2.11) given their focus on affordable homes priced at RM500k and below.

Various headwinds. We remain neutral on the sector’s outlook which continued to be weighed down by oversupply, high household debt, elevated interest rates and weakened consumer sentiment due to high inflation and rising cost of living. Not helping either, is the targeted fuel subsidies which may deny subsidised fuel access to part of the M40 group, eroding their spending power, particularly on big-ticket items such as properties.Meanwhile, the banking industry loans approval rate for property based on BNM’s recent Oct 2023 data came in at 43.9%, marginally improving from Dec 2022’s 43.5%. We opine that the mid-40% approval rates may persist into the near term as banks may continue to exercise prudence in its credit assessment policies. That said, it is possible that a higher uptick could be spurred by a rising proportion of affordable homes in the market as the barrier of entry may be lower. For now, we do not anticipate readings to breach c.50% which was last seen during the industry’s up-cycle between 2011 and 2014 as broader economic concerns may still arise (i.e. recession). On the other hand, household debt-to-GDP readings of 81.9% in 1HCY23 (81.0% in 2HCY22) remains lower than pre-pandemic levels of c.88%. This may reflect continued hesitation in consumers to borrow, particularly for larger commitments, supporting our abovementioned stance.

Reduced overhang, new units focus on affordability. Per NAPIC’s 3QCY23 report, total overhang units (including unsold units under construction) have decreased from 142,475 in CY22 to 126,942, though still more prominent within Kuala Lumpur, Johor and Selangor. While this shows an encouraging consumption of previously unsold units, we highlight that the number of residential launches had also reduced with 3QCY23’s 6,881 units (vs 3QCY22’s 8,226 units) as developers are likely being more selective with their launches. We also note that 57% of the newly launched residential properties are priced below RM500K, with a 31% YoY reduction in units between RM500K to RM1.0m. This signals a growing favor towards affordable homes with aspirationally priced products (>RM500k) possibly being sidelined by the mass market.Developers may continue to react accordingly. Adapting to market conditions, developers will continue to offer a mixed bag of products but with a larger emphasis on affordable homes to cater to first-time house buyers, driven by population growth and urbanization. Increasingly, with the widening of public infrastructure networks in the Klang Valley, transit-oriented developments could be a preferred choice to prospective buyers to lower the burden of commuting. Between our coverage, MAHSING and MKH are likely candidates as key beneficiaries to the present landscape as their well-established presence in these areas adds to their strategic advantage in navigating market conditions.

A patience game for Johor property market. While there has been significant interest from equity investors (but not property investors) in the property market in Johor due to the proposed SEZ in Forest City and improved connectivity with Singapore via the Johor Bahru-Singapore RTS, the developments will only be operational in CY25 and CY26, respectively, in a blue-sky scenario.

The RTS should ease cross-border movements (able to support 40k passenger daily ridership) and encourage immigration, and hence demand for real estate (i.e. accommodation). That said, our recent channel checks continue to indicate that Johor property buyers remain highly skewed to locals or Malaysians working in Singapore. We opine that prospective Singaporean buyers may be more inclined on real estate in more developed cities (i.e. Kuala Lumpur) which are more attainable thanks to their forex advantage. While we note that Johor’s overhang situation did improve in 3QCY23 to 26.1k units (-2.3k QoQ), it was still higher than Kuala Lumpur’s stock (25.8k, -3.7k QoQ).

Our sector top picks are MAHSING and MKH, for which we hold a positive outlook due to their focus on affordable offerings priced below RM500k. In the case of MAHSING, its emphasis on lifestyle-focused products aims to provide ease for firsttime house buyers. This is anticipated to grow significantly given the high demand from first-time buyers. Additionally, effective land bank management and a strategic turnaround are expecting to minimize carrying costs. As for MKH, their unique transit-oriented developments are likely to remain attractive to potential buyers. Moreover, the group’s near net-cash book provides strong flexibility with regards to its financing options, particularly if the group decides to expand their key business segments. We also anticipate possible knee-jerk reactions from the proposed listing of the group’s plantation unit.

Source: Kenanga Research - 12 Jan 2024