• OVERWEIGHT; Top Picks: Sime Darby Property (SDPR), Mah Sing, UEM Sunrise (UEMS), and Sunway. As the US Fed finally starts cutting interest rates, we should see regional institutional funds, developers and property buyers and investors deploying more capital into real estate. Malaysia, a prime destination of data centre (DC) investments due to its strategic location, should continue to see more land and DC transactions, while local and foreign property buyers and investors are more likely to buy properties in high-growth areas – given the stabilising MYR and interest rates.

• More companies may explore the option of listing REITs. As falling interest rates are generally favourable for REITs, we believe more developers may now consider listing their investment properties under REITs. Apart from IOI Properties (IOIPG) and SP Setia – which have been mulling over REIT listings – we think SDPR is also a good candidate, given its growing investment asset portfolio that includes KL East Mall, Senada Mall, Elmina Lakeside Mall, and the logistic assets in Bandar Bukit Raja. The completion of the Google DC in 2026 will further boost the portfolio by another MYR1.5-2bn, from MYR2.6bn presently.

• Recent sale of AirTrunk indicates significant interest in regional DC assets. The recent sale of AirTrunk, the largest DC group in the Asia-Pacific, for an enterprise value of AUD24bn (USD16bn) is said to be the biggest private equity deal this year. This may indicate that regional capital is starting to be deployed back to the real estate sector, given the lower global interest rate environment ahead. According to news reports, based on a historical EBITDA of AUD600m for AirTrunk, the deal values Airtrunk at about 40x EV/EBITDA (>20x forward EV/EBITDA), suggesting a good valuation upside for SDPR, Mah Sing and, possibly, UEMS and Sunway in the future (if they start to own DC assets). We currently value Mah Sing’s DC facility at just 15x EV/EBITDA.

• Great demand for recent launches in Nusajaya area. Since the last property upcycle in 2011-2013, developers have started to see buyers queuing up overnight or in the early morning at their project launches again. The recent soft launch of shop lots by UEMS (ASP MYR1.7-2.3m) and terrace homes by Sunway (ASP MYR1.22m onwards, or MYR550 psf) saw overwhelming demand, with 3-4x oversubscriptions on the pre-launched units. Buyers from Singapore made up 20% of the total pre-sales (for Sunway). We believe this trend will continue, given the renewed interest in the Iskandar Malaysia property market, with the Rapid Transit System, influx of FDIs, JohorSingapore special economic zone (JS-SEZ), and high standard of living in Singapore being key catalysts behind demand.

• The strong prospects for property transactions as we enter the rate cut cycle may have been underestimated. The tabling of Budget 2025, the signing of the JS-SEZ definitive agreement and potential revival of the Kuala Lumpur-Singapore High Speed Rail are the key events ahead. The recent correction represents a good opportunity to re-enter.

Source: RHB Securities Research - 20 Sept 2024