• Maintain OVERWEIGHT; Top Picks: UEM Sunrise (UEMS), Sunway and IOI Properties. We believe the re-rating in property sector still has legs. Overall macroeconomic environment, government policies and investment flows are encouraging, supporting the growth in property sales in 2024- 2025. We remain confident with our positive view on the Iskandar Malaysia property market given the concentration of high profile investments and infrastructure developments that are taking place in the southern region.

• Further rate hike seems almost impossible. US Federal Reserve’s recent signal to cut or maintain interest rates this year may offer some relief, especially emerging markets that experienced significant currency weakness last year. The shift away from the higher-for-longer approach also suggests a potential conclusion to the interest rate upcycle. This is favourable to the property market as it should indicate a more stable interest rate trajectory ahead. In the meantime, the market is expected to gradually adapt to the prevailing high inflationary environment.

• The sector is still under-owned. After our rounds of marketing in 4Q23, we think many local institutional funds have yet to take a meaningful position in the property sector. Foreign shareholding, for example, has yet to increase substantially. Both UEMS and Sunway have foreign shareholding of <6%, as compared to about 22% during the peak a decade ago (GIC’s shareholding made up 12% for Sunway then).

• The revival of HSR a potential kicker for next re-rating. Last month, Prime Minister Datuk Seri Anwar Ibrahim said the Government has principally agreed to revive the Kuala Lumpur-Singapore High Speed Rail (HSR) project if it could substantially lower the cost. In a recent media interview, Johor’s Sultan Ibrahim Sultan Iskandar also expressed his support to revive the project. We think MyHSR Corp may likely provide some updates regarding the project, especially after the deadline for the submission of the request for information (RFI) concept proposals which was extended until 15 Jan 2024. Positive progress on the project should see a boost in demand for properties, not only in Iskandar Malaysia but also in Kuala Lumpur.

• RNAV re-rating to be more significant in Iskandar Malaysia. In the short term, both Malaysia and Singapore governments are expected to sign the MoU for the highly-anticipated Johor-Singapore special economic zone (SEZ) on 11 Jan 2024. The recent entry of Nvidia and Microsoft points to a boost in confidence among foreign investors, especially in the data centre space. The influx of investments and rising demand for industrial lands are already driving the land prices in Johor, and major landowners such as UEMS and Sunway will likely enjoy further RNAV re-rating going forward.

• Expect 10-15% growth in property sales. We expect most developers to guide 2024 sales target that is 10-15% higher than the 2023 target. A number of developers indicated that they plan to roll out more projects in Iskandar Malaysia this year.

Source: RHB Securities Research - 8 Jan 2024