We maintain UNDERWEIGHT on the sector. We hold the view that the market has adequately priced in the immediate to short-term impact of data centre investment and Johor economic transformation to the sector. Meanwhile, the sector’s headwinds remain aplenty including oversupply, high household debt, elevated interest rates and weakened consumer sentiment. Nonetheless, we see a bright spot in the affordable housing segment. We downgrade our calls for MAHSING (TP: RM1.87) to MARKET PERFORM (from OUTPERFORM), and SIMEPROP (TP: RM1.08) and UOADEV (TP: RM1.79) to UNDERPERFORM (from MARKET PERFORM) as their valuations have become rich after the recent run-up in their share prices. Our sector top pick is MKH (OP; TP: RM1.83).

Exuberance driven by data centre and Johor. Investors have piled into property players driven mainly by two common themes:

1. Their investment in data centers or land sales to data centre developers; and

2. Johor economic transformation with the commissioning of the Johor Bahru-Singapore Rapid Transit System (RTS) in 2026 that will drive more Malaysians to work in Singapore, boosting housing demand in Johor Bahru and affordability, underpinned by their SGD-denominated incomes, and the Special Economic Zone (SEZ) status to be granted to selected areas, and Special Financial Zone (SFZ) status to Forest City, that will benefit landowners and developers of luxury condominiums targeting foreign buyers in Johor Bahru.

We hold the view that the market has adequately priced in the immediate to short-term impact of these developments to most property names. A case in point is, when ECOWLD (UP; TP: RM1.41) announced the sale of 123 acres of land in Kulai for RM402.3m and UEMS (Not Rated) announced the sale of 28.9 acres of land in Iskandar Puteri for RM144.9m, both in Jun 2024 to overseas-based data centre developers at premium pricing, the reaction to their share prices had been muted.

We advocate investors who are taking an immediate to short-term view on the data centre and Johor economic transformation themes to lock in profits. While we believe these investment themes may still have legs over the long term, investors will have to be prepared for a much lower return as the easy money has already been made upfront. We maintain UNDERWEIGHT on the sector.

Multiple challenges. The sector's headwinds remain aplenty including oversupply, high household debt, elevated interest rates, and weakened consumer sentiment resulting from high inflation and rising living costs.

According to BNM’s latest data as of Apr 2024, industry approval rates appear to remain flattish at 43.1% (Dec 2023: 43.4%; Dec 2022: 43.5%). There has also been a gradual rise in overall applications possibly fuelled by the influx of affordable home products which are more assessable to the wider market. We opine that subsequent approval readings may only range bound between 40%-45% (being the recent years’ average) as the abovementioned inflationary pressures could invite delinquencies should loan approvals become more lenient. On the other hand, household debt-to-GDP readings of 84.2% in 2HCY23 (81.0% in 2HCY22) is still lower than pre-pandemic levels of c.88%. While the rise could be attributed to higher average interest rates, the rising inflow of mortgage books may also contribute to the increase.

Rising property stock prices may be uplifted by better market sentiments arising from government incentives, infrastructure developments, and significant activities in Johor, such as large-scale projects and cross-border economic activities with Singapore. However, we are wary that these may only serve as a temporary catalyst should excessive overdevelopment lead to further excess in supply without meaningful demand to support.

An increase in overhang units, continuing the trend towards affordable housing. Affordability remains a major issue, with the median house price at RM335k and average monthly salaries around RM3k to RM3.5k. This gap challenges many Malaysians, particularly first-time home buyers under 35 years of age. NAPIC's 1QCY24 data shows a 3% increase in overhang units, now at 125,362, concentrated in Kuala Lumpur, Johor, and Selangor (vs. 121,568 in 4QCY23). While 58% of new properties are priced below RM500K, a significant portion of overhang units—58% of serviced apartments and 29% of residential properties—are priced between RM500K and RM1m. This suggests a persistent mismatch between supply and demand, as it appears that many buyers may not be able to afford properties priced above RM500k. Government schemes aimed at first-time buyers are crucial, yet they may not fully resolve affordability issues.

The property market's performance in 2023, outperforming 2022, is likely driven by a surge in buying due to pent-up demand post-pandemic. However, the sustainability of this surge beyond 2024 is uncertain, as once the pent-up demand is satisfied, the market may slow down unless supported by robust economic growth and improved affordability. This uncertainty is compounded by the rising prices of houses while salaries remain stagnant, further straining affordability. Notwithstanding, the recent rationalisation of diesel subsidy may further aggravate inflation. Developers are adapting to these market dynamics by offering a mix of products with a heightened emphasis on affordability to cater to first-time house buyers and align with shifting consumer preferences influenced by ongoing economic uncertainties.

Meanwhile, the industrial property sector shows potential due to e-commerce growth and increased demand for logistics and warehouse facilities, along with government efforts to attract FDI. We reckon developers are increasing exposure on industrial properties as a means to reduce its dependency on residential markets from rising risks related to affordability and oversupply.

Outlook. Looking ahead, the Malaysian property sector will continue prioritizing affordability driven by population growth and urbanization. Transit-oriented developments, particularly in the Klang Valley, are expected to gain traction as buyers seek convenient commuting options. Despite economic shifts and regulatory challenges, the sector has shown resilience. Developers are focusing on affordable housing to meet evolving consumer demands and economic uncertainties, while the industrial segment anticipates growth fuelled by e-commerce and manufacturing expansions. This strategic adaptation positions the sector for sustained development amidst changing market dynamics.

We downgrade our calls for MAHSING to MARKET PERFORM (from OUTPERFORM), and SIMEPROP and UOADEV to UNDERPERFORM (from MARKET PERFORM) as their valuations have become rich after the recent run-up in their share prices. Meanwhile, we reduced our TP for MKH by 13% to RM1.83 (from RM2.11) to reflect the dilution of its stake in the plantation unit to 59.6% (from 95.0%) following the recent IPO of the unit and distribution of the unit’s shares to MKH’s shareholders.

Our top sector pick is MKH given: (i) its focus on affordable homes priced below RM500k with strong demand from first-time house buyers; (ii) its transit-oriented development projects that will benefit from the switching to public transport from private vehicles following fuel subsidy rationalization, and (iii) its expanding plantation business in Kalimantan and its proximity to the new capital city of Indonesia that opens itself up to various opportunities.

Source: Kenanga Research - 1 Jul 2024