• Maintain OVERWEIGHT. Despite the recent volatility in the equity market, we still see value in the property sector. Our investment thesis remains unchanged: i) The interest rate upcycle is nearing an end, and ii) China’s reopening should benefit companies that own retail and hospitality assets. The Government’s plan to expand the international airports in Penang and Subang, as well as establish a special financial zone in Iskandar Malaysia, should have a positive spillover effect on the property market over the medium term. Top Picks: IOI Properties and Matrix Concepts.

• Banking crisis may prompt a slowdown in rate hikes. While Bank Negara (BNM) has not raised the overnight policy rate (OPR) any further this year, the banking crisis in the US may urge central banks in the region to slow down the increase in interest rates while monitoring global market conditions. This is somewhat favourable for potential property buyers, as it could mean mortgage rates will most likely stabilise at current levels (at c.4.0-4.1%) over the next 3-6 months. We also believe the interest rate upcycle should peak by 1H23 – current stock valuations have already factored in the impact of further rate hikes on property demand.

• Expect sales momentum to be sustained in 2023. Aggregate property sales grew 11% QoQ in 4Q22. However, despite the multiple rounds of OPR hikes and rising inflationary pressure, aggregate property sales only dropped by 2% YoY in 2022. In addition to the unstable political environment towards end-2022 (when the 15th general election (GE15) was held in Nov 2022), property buyers have been relatively unperturbed by these macroeconomic factors – this is possibly due to the healthy pick-up in economic growth post-pandemic.

• Developers are turning more confident. Many developers under our coverage have become more upbeat on the property market this year, in view of their more aggressive launching pipelines and sales targets. Compared to the past when it had only one new project in a year, UOA Development will launch three new projects this year. Other companies such as SP Setia, UEM Sunrise and Mah Sing have set higher sales targets, implying 5-15% YoY growth for 2023F.

• Economic zone and infrastructure projects are potential catalysts. We are upbeat on the Government’s plan to establish a special financial zone in Iskandar Malaysia, and to expand the international airports in Penang and Subang, Selangor to cater to demand, ie an expected influx of investors, business travellers and tourists. While details are still scarce at this juncture, we believe these potential catalytic developments could help to boost the confidence of property buyers.

• Valuations. The property sector is trading at a c.71-72% discount to RNAV, and the recovery in demand and potential earnings growth in 2023-2024 are not yet priced in. The recent pullback in property stock prices has brought about opportunities for investors to accumulate.

Source: RHB Research - 5 Apr 2023