• Maintain OVERWEIGHT. We remain upbeat on the sector given the positive news flow that could lift the property market sentiment, including the revival of major infrastructure projects, potential review of Malaysia My Second Home (MM2H) programme, other potential catalytic developments, as well as stable interest rate outlook. We believe property sales momentum will stay strong this and next year, and Johor property market should see sustainable recovery going forward. Our Top Picks are now UEM Sunrise (UEMS), IOI Properties (IOIPG) and Matrix Concepts (MCH).

• Catalytic developments to drive property market sentiment. Over the last few months, news flow seems to favour the Iskandar property market. These include: i) the proposed Johor-Singapore special economic zone, ii) review of MM2H, and iii) the revival of KL-Singapore high-speed rail (HSR) project. Indeed, property as a high-beta sector already saw some positive momentum since early July.

• Cheap MYR may possibly be another boost to Iskandar Malaysia. The sharp weakening of MYR hit equity market sentiment in 2Q, but the cheap currency has helped to spur spending from foreign visitors, especially from neighbouring Singapore. During our recent visit to Johor, we learnt from our colleagues and corporates that visitors from Singapore have been increasing not only during the weekends, but also starting from Friday. With the completion of the Johor Bahru-Singapore Rapid Transit System (RTS) in end 2026, the flow of visitors from Singapore should increase even during weekdays. We believe this should have a positive spillover to the property market soon.

• Overhang on political instability should be over soon. Political risk is expected to ease after the conclusion of the state elections by August, and this should allow the Pakatan Harapan-led administration to implement its reform agenda and move ahead with the mega infrastructure projects. Property stocks, given their high beta, should continue to re-rate, especially given their undemanding valuations.

• Interest rate outlook should remain stable. Market is probably expecting zero or one more interest rate hike in 2H23. With interest rate normalisation path coming to an end, this should provide some certainty, especially among home buyers as well as property investors. Current mortgage rate stands at about 4.5-4.7%, back to the pre-pandemic levels.

• Prefer developers that can benefit from major infrastructure projects. Given the catalysts from the HSR project and RTS, which is already ongoing, our new Top Pick is UEMS. We also retain IOIPG and MCH as our Top Picks given their solid fundamentals as well as respective landbank exposure which could potentially benefit from the HSR project (if the alignment under the previous proposal is maintained).

Source: RHB Research - 17 Jul 2023