We  maintain  NEUTRAL  on  the  sector.  While  current  valuations  could have  priced  in  the  impact  of  the  reversal  of  liquidity  and  rising  policy risks, the sector will likely see an overhang in the immediate term until the  Budget  2014  is  announced  on  25  Oct.  We  continue  to  like developers  with  strong  fundamentals  and  minimal  exposure  to  foreign purchasers. Our Top Picks are IJM Land and Tambun Indah.

- Negative  factors  already  priced  in.  On  5  July,  we  downgraded  the sector  to  NEUTRAL  from  Overweight.  From  then  up  to  August,  the KLPRP index had fallen 9% vs the FBM KLCI’s 3% drop over the same period.  Despite  the  correction,  the  sector  will  likely  see  an  overhang  in the immediate term until the Budget 2014 is announced in end-October. 

- Challenges ahead. While the reversal of liquidity flows and rising bond yields  have  eased  somewhat,  the  property  sector  still  faces  other challenges, including: i) rising cost pressure as a result of the fuel price hike  and  the  nationwide  crackdown  on  illegal  immigrants,  ii)  weaker consumer sentiment due to the imminent rising inflationary pressure from the  fuel  price  hike,  and  iii)  potential  tightening  policies  that  could discourage  local  and  foreign  buyers  from  investing  in  the  property market. We also expect mortgage rates to gradually increase, in line with the  overseas  markets,  on  the  back  of  higher  bond  yields  and  the resulting interest rate risk. These factors have, together, given rise to the current consolidation in the property market.

- Regulatory  risk.  Fears  of  regulatory  tightening  typically  heighten  1-2 months  before  the  announcement  of  the Government’s  budget.  While there  has  been  media  speculation  of  drastic  measures,  including  a  big increase in real property gain tax (RPGT) and stamp duty, we expect the Government  to  adopt  milder  measures,  such  as  a  gradual  increase  in RPGT to ensure healthy growth of the industry. In addition, given that the tepid GDP growth at below 4.5% in 1H13, drastic measures that constrict the sector would be unreasonable, in our opinion.  

- Maintain NEUTRAL. Property stocks are vulnerable to a selldown as we expect  sporadic  rumours  of  policy  tightening  in  the  coming  weeks. Hence,  we  maintain  our  NEUTRAL  rating  for  now. We  advise  investors to  accumulate  quality  property  stocks  at  depressed  valuations.  We  like developers  with  solid  fundamentals  with  minimal  exposure  to  foreign purchasers. Our Top picks are IJM Land and Tambun Indah.

Source: RHB