We expect property sales growth to be flat next year, after an estimated 28% fall in 2015. The macroeconomic environment remains challenging while local banks continue to tighten mortgage lending. The key silver linings could be the news flow on the high-speed rail, MRT2 and the possible return of foreign/Chinese buyers into Malaysia’s property scene. Current sector valuations are undemanding. Our stock picks areUOA Development, Tambun Indah and MRCB.

Another challenging year ahead. Although the property market’s weakening trend has largely stabilised after a slowdown in the past 1.5years, the recovery could be mild and limited. Macro economic factors have yet to turn supportive, as: i) GDP growth is expected to slide to 4.5% in 2016 from 4.8% in 2015, ii) sluggish commodity prices should continue to exert pressure on the MYR, and iii) global interest rates are set to rise. Meanwhile, banks continue to tighten credit financing. The key upside risk would be a sharp strengthening of the MYR that mayinstill market confidence.

High-speed rail coming soon? News flow on the Kuala Lumpur (KL)-Singapore high-speed rail could potentially garner investor interest on the sector. After the disposal of 1Malaysia Development Bhd’s (1MDB) power assets to a China-based corporation, the Chinese party is also said to be keen on the rail project. In our view, the closer ties between Malaysia and China as well as the cheap MYR could help to attract more foreign/Chinese buyers to re-enter Malaysia’s property scene.

Opportunity to accumulate value stocks. Although we keep our NEUTRAL sector rating, we see value in some property stocks. The sector has rebounded slightly since September to a 48% discount to RNAV from 51%, and trading opportunities may arise especially for developers that are trading at undemanding valuations.

Stock picks. Our stock picks are UOA Development, Tambun Indah Land (Tambun Indah) and Malaysian Resources Corp (MRCB). We believe UOA Development and Tambun Indah’s property sales shouldrebound strongly this year, given the strong pipeline of projects that will be rolled out after a lacklustre 2015. We also continue to like MRCB’s turnaround story. Management has thus far delivered what it has guided, and we think its efforts in re-strategising the company should help tokeep the momentum of construction job flow and property development works in 2016.

Opportunity To Accumulate Value Stocks Another challenging year ahead Malaysia’s property sector has seen a slowdown in the past 1.5 years. Although the weakening property sales trend for the sector has largely stabilised, we believe the potential recovery next year could be mild and capped by the economic growth outlook, as shown in Figure 1. Macroeconomic factors have yet to turn supportive, as: i) RHB economists expect GDP growth to fall to 4.5% in 2016 from 4.8% in 2015, ii) sluggish commodity prices may continue to exert pressure on the MYR, and iii) global interest rates are set to rise next year. All these factors are unfavourable to the revival of market sentiment. Residential property sales value for the industry has contracted by 7.4% in 2015 on an annualised basis, and we forecast it to be +0.1% in 2016, largely flattish. In our view, the key upside risk could come from a sharp appreciation of the MYR if crude oil price rises, as this should help to instill market confidence.

Expect flat property sales growth and slight margin contraction in 2016 2015 is largely the year for developers to unwind their inventories. Not many projects have been rolled out, given the weak market sentiment and negative news flow on the macro economy. The cautious sentiment will likely continue going into 2016, and we expect new launches to gradually come back and developers will likely launch the projects in batches to test the market.

After a record property sales growth of +41% in 2013 for key developers under our coverage, the numbers fell by 26% in 2014 and 28% (estimated) in 2015, largely ledby the impact of cooling measures in 2014 and the challenging market conditions in 2015 (the implementation of the goods and services tax (GST), a plunge in crude oil price and a sharp weakening of the MYR). As economic growth is expected to be lethargic, we expect property sales growth to be flat next year.

Property price growth and transaction volume should remain sluggish, as developers have limited power to mark up given the soft sentiment. In fact, we expect developers’ margins to contract gradually over the medium term as they will likely offer more rebates or discounts, more interior furnishing, and furniture vouchers to draw buyers. Already, we saw gross margins of key developers in Malaysia declining to 25-30% this year from 30-35% in 2013.

Banks continue to curb lending Commercial banks are expected to continue to tighten credit financing as there seems to be no plan for easing by the Central Bank any time soon, given the high household leverage. Since the Central Bank issued prudent lending guidelines in 2013, the banks have not aggressively grown their mortgage lending, and loan rejections have been the key reason for slow take-ups in many property projects. According to the Central Bank’s monthly statistics, the number of loan applications and loan approvals for residential properties has dipped below 2013 and 2014 levels. We believe this trend should continue going into 2016, as banks emphasis e more on improving asset quality. Furthermore, Malaysia’s household debt-to-GDP currently stands at 88.1%, one of the highest in the region. As GDP growth slows, we believe the ratio will likely stay at high levels even though the growth in household debt moderates. According to many developers, the average loan rejection rate is as high as 50-60% currently.

In the meantime, although house price growth has softened considerably to +5.6% in2Q15 from +12.2% in late 2013, we do not expect the Government and the Central Bank to relax any of the macroeconomic prudential measures, including the developer interest bearing scheme (DIBS). Both authorities indicated that there is a mismatch between supply and demand, particularly for affordable houses. If DIBS is to be reinstated, we are concerned that this may drive up home prices again.

High-speed rail and potential China money flow The upside potential for the sector could come from news flow on the KL-Singapore high-speed rail. After the recent disposal of 1MDB’s power assets to China General Nuclear Power Corporation, the media reported that the Chinese party is also interested in the high-speed rail project that could be finalised this year. This may stir up investor interest in the property sector, as the infrastructure development should have a positive spillover effect on the Klang Valley property market, especially around the city centre area, as the connectivity between Kuala Lumpur and Singapore will be further enhanced.

Apart from the power asset transaction, we have witnessed greater involvement of Chinese corporations in Malaysia’s construction, infrastructure and property development segments in 2015. Malaysian companies or government agencies have been joining hands with China-based corporations in projects across Malaysia, such as Eastern & Oriental’s (E&O) reclamation work, the completed Penang Second Bridge, the ongoing construction of many high-rise projects in KL city centre, as well as massive property projects in Iskandar, Johor. Recently, according to some media reports, some Chinese corporations are also among the bidders or the Bandar Malaysia development. Hence, given the cheap MYR and closer ties between Malaysia and China, we think the link would help to attract more foreign/Chinese buyers to re-enter Malaysia’s property scene.

Source: RHB Research - 5 Jan 2016