• Maintain NEUTRAL. There was no major positive surprise from the Government’s Budget 2023 announced last week. Near-term performance of the property sector will hinge on the outcome of the national poll, while a sustainable recovery can only be seen when the interest rate upcycle comes near to an end. For now, we continue to like affordable landed township player Matrix Concepts and asset owner IOI Properties. Sunway is also our Top Pick now given its exposure to various business divisions that should benefit from the reopening of economy.

• Budget 2023 neutral to the property industry. Budget 2023 only saw a slightly larger reduction in stamp duty for property priced MYR500,000 to MYR1m. The slightly bigger discount on stamp duty is insufficient to push marginal property buyers to make their decisions on acquiring big-ticket items – especially when interest rates are climbing upwards.

• Developers’ margin remains under pressure. Issues of building material price hikes and labour shortage were not addressed in the Budget and remained unresolved. We expect pressure on developers’ profit margin to be more visible in 2H as billings may stay slow, with property prices having not risen substantially to cover the incremental building costs.

• Impact of interest rate hike to gradually kick in. Bank Negara Malaysia (BNM) has so far raised 75 bps in the overnight policy rate (OPR) this year. Mortgage rate, as a result, has increased to 3.6-3.9% from the low of 2.95- 3.0%. Although property sales were still quite encouraging in 1H, we think the momentum may start to ease in 2H as the first rate hike this year took place in May, and hence, the effect should gradually kick in from 2H, in line with the historical trend. We reiterate that, home buyers tend to be more sensitive to rate hikes amidst an inflationary environment, as every 25 bps hike in the OPR will lead to a 3.2-3.5% rise in monthly mortgage repayment. In addition, we also expect GDP growth to slow to 4.5% next year from 6% this year.

• Market liquidity is evaporating. As global interest rates continue to rise and market liquidity gradually dry out, the performance of the high-beta KL Property Index continued to be negatively hit, in tandem with the broader equity market, and the FBMKLCI. The property industry has been consistently lacking fresh catalyst for a sustainable recovery over the past few years. The decreasing market liquidity would simply mean lowering demand for real estate, and hence developers’ earnings are expected to be sluggish over the next 1-2 years.

• Outcome of general election may drive near-term performance post- election, given the current depressed valuations of the sector. However, long-term outlook remains dependent on the evolution of the global macroeconomic environment. A sustainable sector recovery may happen only when interest rate upcycle comes near to an end.

Source: RHB Research - 11 Oct 2022