This report dives into the exciting rise of developers’ share prices, showing why this surge is more than just a fleeting trend but rather a golden opportunity worth accumulating. The Malaysian property sector is poised for a period of significant growth, driven by the end of the BNM's interest rate hike cycle, major infrastructure projects, the establishment of special financial hubs and economic zones, and homeowner-friendly policies. In addition, the burgeoning Data Centre thematic play, which was absent during the 2013 upcycle, is now a significant growth driver. The property market is not only riding a wave of positive news but is also backed by solid fundamentals and growth prospects. Despite the sector’s current valuation being above the long-term average, the strong economic fundamentals and new growth drivers provide a compelling case for continued upward momentum. Maintain Overweight. Top Buy Picks are IOIPG, SIMEPROP and IBRACO.

Property Sector Continues Its Bullish Trend in 1H24

Since August last year, our stance on the property sector has turned bullish, spurred by the emergence of compelling catalysts driving a re-rating. These include (i) political stability, (ii) increased foreign direct investments, (iii) the rollout of major infrastructure projects, (iv) the establishment of special economic zones, and (v) the continuation of homeowner-friendly policies. This positive shift has been validated by the remarkable rally in share prices among property developers, with the Bursa Property Sector Index (KLPRP Index) concluding 2023 as the second-best performer on Bursa Malaysia. Notably, it recorded a substantial gain of 34.5%, trailing only behind the Utilities Sector Index, which surged by 51.4%. This performance notably outpaced the benchmark FBMKLCI, which experienced a decline of 2.7%.

This year, Malaysia's property sector continues its bullish trend, with the KLPRP Index surpassing the 1,100-point mark last month, a level not seen in over six years since March 2018. The ongoing rally, which began in mid-2023, remains strong, as evidenced by the index reaching a sixyear high on 12th June to touch 1,149 points, amidst improved market sentiment. Although the KLPRP Index retracted some gains in the last two weeks of June as investors locked in profits, it still maintains a 28.7% gain year-to-date (YTD), outperforming the benchmark FBMKLI's 10.7% increase – see Figure 1.

Valuations Climbing But Still Far From the Peak

Over the past 14 months, the KLPRP Index has enjoyed impressive gains, sparking concerns among some investors about missing out and even whispers of a "bubble". However, let us dive into the numbers to see why there is still plenty of growth potential. Despite the significant gains, the KLPRP's current forward Price-to-Book (P/B) ratio is at 0.67x, just a tad above its long-term average of 0.65x from 2008 to 2024 - see Figure 2. To put this into perspective, during the property boom from 2011-2013, the average P/B ratio was 0.86x, peaking at 1.16x. If today's market were to reach that peak, the KLPRP Index could soar to 1,918.99, representing a whopping 73% upside from current levels!

Now, let us consider a different angle: the valuation spread from trough to peak. In the previous upcycle, the sector valuation transitioned from a 33% discount to book value to a 16% premium over 21 months, reflecting a 49-percentage point improvement. If we experience a similar spread from the May 2023 low of 0.42x, the peak P/B ratio could reach approximately 0.92x. This could push the KLPRP Index to 1,521.95, adding another 37% from where we are now, which appears plausible. We are currently in the 15th month of this bull run, and based on past cycles, there is still plenty of room to grow. Despite already showing attractive gains, we believe this rally has more fuel in the tank and could run even longer.

The Rally Has Fresh Legs to Run Longer

To fully grasp the current rally in developers' share prices and support our belief that this momentum has the potential to extend further, it is essential to reflect on past boom cycles and the underlying drivers observed during those periods.

Let us take a trip back to the most recent upcycle between 2011-2013. Recovering from the EU debt crisis in 2011, Figure 3 & 4 show that the Malaysian property market has enjoyed a remarkable boom. This period was propelled by several key factors, including a favourable domestic market outlook fuelled by the Economic Transformation Programme (ETP). Major infrastructure projects such as the KVMRT, LRT 3, BRT, and the proposed (though later scrapped) KL-Singapore High-Speed Rail (KL-SG HSR) have significantly influenced property market dynamics, particularly in submarkets located near transit stations. High-impact developments like Kwasa Land in Sungai Buloh, and Tun Razak Exchange in Kuala Lumpur also contributed to the boom. Additionally, the launch of Economic Corridors, especially Iskandar Malaysia, attracted a wave of investment to Johor. This influx resulted in higher economic activity and more job creations, boosting the property market even further.

However, the upcycle eventually lost steam due to a series of cooling measures. The sector began to feel the impact after the stringent Budget 2014 was announced. This budget was particularly harsh on private developers, with several key changes: the minimum property purchase price for foreigners was doubled from RM500,000 to RM1.0mn, the developer interestbearing scheme (DIBS) was banned, and the Real Property Gains Tax (RPGT) rates were hiked.

In 2013, Malaysia's economic strength was centred primarily on the Klang Valley and Johor. Fast forward to 2024, and we have witnessed the emergence of two additional economic powerhouses: Penang and Sarawak. For the first time in Malaysian history, major public transportation infrastructure projects are simultaneously underway in the Klang Valley (MRT3 & HSR), Johor (RTS, HSR & ART), Penang (LRT), and Sarawak (KUTS ART). This shift, alongside an improving macro-economic outlook, increased infrastructure investments, and various housing schemes aimed at assisting first-time homebuyers, points towards a more resilient housing market moving ahead. Recent revisions to the MM2H requirements are also anticipated to attract foreigners back to Malaysian shores. Moreover, the burgeoning Data Centre thematic play, which was absent during the 2013 upcycle, is now a significant growth driver.

Strong demand, favourable market conditions, positive investor sentiment, expansion into new economic regions, and the growth of data centres collectively form a solid foundation for sustained growth in share prices, justifying a valuation above the long-term average.

We will delve deeper into these catalysts in the next section of our report.

Ample Catalysts to Watch

The second half of the year is set to be an exciting period for the property market, driven by several key catalysts:

1) News Flows on Infrastructure Development Are Gaining Momentum

Fiscal stimulus, particularly infrastructure spending, has always been a significant driver of growth in the property market. The recent green light for the Penang LRT project is set to jazz up Penang Island's property scene. The Penang LRT Mutiara Line, stretching 28km, will feature 21 stations, with the passenger station starting from Bayan Lepas to Komtar and one line to Butterworth (Penang Sentral). Construction is slated to kick off in the fourth quarter of this year, with completion anticipated by 2030.

Meanwhile, in the bustling Klang Valley, plans are underway to reinstate five more stations to the LRT3 and the eagerly awaited MRT3 project should see contract awards starting in the fourth quarter. Down south, Johor is preparing its proposal for the Johor Bahru ART system, expected to be revealed by late 2024, coinciding with the completion of the RTS linking Johor to Singapore. The potential revival of the KL-SG HSR is anticipated to substantially enhance transport connectivity, drive economic development, and strengthen bilateral relations between Malaysia and Singapore.

Over in Sarawak, Sarawak Metro is accelerating rail contract awards of the Kuching Urban Transportation System (KUTS), aimed at modernising public transport and easing traffic along the Kuching-Samarahan highway. The awards for the KUTS project’s Blue Line Package 2 and Green Line are expected this year. In our opinion, these infrastructure projects are not just about building better transport networks; they are about driving growth, improving connectivity, and boosting property markets across Malaysia.

2) Data Centres Related Ventures Positive for Developers

Malaysia is now a hotbed for data centres, attracting major investments thanks to its strategic location near Singapore and the ripple effects of the US-China trade tensions. With affordable land, water, and power, the country has become a top choice for tech giants. Johor, especially, is leading the charge, with key industrial parks like Nusajaya Tech Park, Sedenak Tech Park, and YTL Green Data Centre Park drawing billions in investments – see Figure 6. Key players including YTL Power-NVIDIA (USD4.3bn), Amazon Web Services (USD6.0bn), Microsoft (USD2.2bn), Google (USD2bn), ByteDance (USD2.1bn), and GDS Holdings (RM14.3mn) have committed to building their data centres in Malaysia, underscoring their growing importance in the global tech landscape.

Amid expectations of robust future demand from the artificial intelligence, cloud computing, and Internet of Things sectors, developers are seizing the opportunity by announcing deals related to disposing of land to data centre operators, building-and-leasing data centres to operators, and directly participating in the data centre business. This excitement has led to a sharp increase in land demand in Pulai, pushing land prices up by 15% to a record RM138 per square foot in just six months.

CRESNDO, for instance, has generated approximately RM792mn in cash over seven months by selling nearly 150 acres of land earmarked for industrial and data centre construction in Johor – see Figure 7. This selling spree has significantly boosted CRESNDO's share price, which has risen over 61% YTD.

Among the developers under our coverage, SIMEPROP is involved in a deal valued at RM2bn to build and lease out a hyperscale data centre at its Elmina Business Park. Meanwhile, MAHSING has announced a joint venture with Bridge Data to develop a data centre in Southville City, Bangi, Selangor, with plans to replicate this model in its other industrial parks in Sepang and Pasir Gudang. Since these announcements, share prices for SIMEPROP and MAHSING have increased by 25% and 17%, respectively. SUNWAY is the latest to enter data centre-related deals, selling 64 acres of land for RM380mn to Equalbase for data centre development in Sunway City Iskandar Puteri. SUNWAY’s share price hit a fresh record high following the announcement.

We believe this strategic move offers the following benefits for developers. Firstly, selling land to data centre operators provides immediate capital inflow, unlocking the value of assets that can be reinvested into other projects. Secondly, the build-and-lease model offers steady and recurring income, ensuring financial stability while retaining ownership of appreciating assets. Additionally, direct participation in the data centre business opens new growth opportunities, tapping into the booming AI, cloud computing, and IoT sectors. This also accelerates the utilisation of idle land, transforming unproductive areas into valuable assets. Furthermore, data centres enhance the overall value of landbanks, as the land hosting these facilities becomes more valuable. Lastly, data centres contribute to technological and economic boosts, attracting tech-related businesses and creating innovation hubs, which in turn drive demand for nearby residential, commercial and industrial properties.

Overall, we believe this shift towards data centre ventures—whether through land disposal, build-and-lease agreements, or direct participation—aligns with the rising demand from AI, cloud computing, and IoT sectors. This strategic initiative helps developers diversify revenue, efficiently utilise land, and enhance land value, positioning themselves advantageously in the evolving market landscape.

3) Revised MM2H Criteria Bodes Well for Property Market

The latest revisions to the Malaysia My Second Home (MM2H) program demonstrate significant improvements over the 2021 rebranded version. Notably, the updated program has eliminated the offshore income and liquid assets requirements and reduced the fixed deposit requirements with the introduction of the Silver category. Additionally, the age requirement has been lowered, broadening eligibility for younger applicants who were previously excluded.

The new MM2H program introduces three categories: Silver, Gold, and Platinum, as well as a special category for Special Economic Zones (SEZ) and Special Financial Zones (SFZ). One key update is the mandatory house purchase requirement for MM2H holders, with minimum purchase values set at RM600,000 for the Silver category, RM1mn for the Gold category, and RM2mn for the Platinum category. In particular, the SEZ-SFZ category stipulates that MM2H holders can only purchase property from the primary market. This condition is expected to positively impact developments like Forest City, a designated SFZ area in Johor, by potentially boosting property sales within the project.

In our opinion, the proposal to ease conditions for the Malaysia My Second Home (MM2H) programme has the potential to significantly boost foreign real estate investments and potentially address overhang issues in the country. The latest revisions indicate the government's intent to create more favourable and competitive MM2H terms, aiming to rekindle interest among tourists and foreign investors in Malaysia. We believe this adjustment could attract more foreigners to our shores, positively impacting the real estate market. Moreover, by relaxing the MM2H program, Malaysia can continue to vie for highly skilled foreign individuals, fostering their contributions to the nation's growth through residency and investment. Nevertheless, the requirement of a 90-day residency may pose a challenge for individuals looking to participate in MM2H as long-stay tourist visa holders. This condition may restrict their eligibility for the program. In contrast, Indonesia's Second Home and Cambodia's My Second Home programmes do not impose a minimum annual stay.

4) Supportive Government Policies

The property market is also set for a promising boost thanks to several forward-thinking government policies.

First up, the National Energy Transformation Plan (NETR) offers developers the opportunity to convert idle land into solar farms and implement rooftops solar solutions, enhancing property value while promoting sustainability. SIMEPROP is at the forefront, integrating rooftop solar solutions into residential projects and planning large-scale ground-mounted solar farms in Jerai, Kedah (365 acres) and Pagoh, Johor (635 acres). They are also piloting solar solutions with 1,000 homes in the City of Elmina, Shah Alam, pioneering green townships and reducing carbon footprints. By engaging in these initiatives, SIMEPROP not only monetises non-core land but also solidifies its role in the NETR by actively generating, distributing, and consuming solar energy. Elsewhere, UEMS and partners are developing a 40-acre renewable energy industrial park in Iskandar Puteri, Johor, as part of a one-gigawatt hybrid solar power plant project led by UEM Group Bhd under the NETR. In partnership with ITRAMAS Corp and China Machinery Engineering Corp (CMEC), the industrial park will feature a renewable energy hub with a solar module factory and research facilities, supporting Malaysia’s energy transition and EV ecosystems.

Then, the property sector is expected to be a beneficiary of the New Industrial Master Plan 2030 (NIMP)’s focus on boosting high-value industries and exports. This will drive demand for dedicated industrial zones. Demand for industrial properties has surged since national borders reopened in April 2022, driven by logistics and warehouse needs, as well as trade diversions from China. Figure 8 shows that industrial property transactions in Selangor, Penang, and Johor are buzzing with activity. In 1Q24, the transaction value for the three states collectively hit a record high of RM5.4bn (+31% YoY). We anticipate more special industrial zones to emerge across the country to meet growing sector demands

Lastly, we believe the Johor-Singapore Special Economic Zones (JS-SEZ) initiative is a gamechanger for Johor’s property market. The JS-SEZ marks a fresh approach compared to the previous Iskandar Malaysia Region as the SEZ is now backed by solid support from both Malaysian and Singaporean governments, fostering agreements in cybersecurity, digital economy, and infrastructure. Enhanced by projects like the RTS, and potentially the KL-SG HSR, it promises smoother connectivity and less border congestion. Following the implementation of passport-free QR clearance system for Malaysians at JB checkpoints from June 1, we expect upcoming news on innovative features like digitised cargo processes and enticing incentives for industry players. Therefore, we expect landowners like UEMS, SUNWAY, IOIPG, ECOWLD and SCIENTX, with landbanks strategically positioned near the second link (Iskandar Puteri) and Kulai, to reap greater benefits from these developments.

Price Rally Also Supported by Fundamental 

Beyond the recent news-driven rally, we see sustained momentum in the market, supported by robust property sales and profit growth. We project a 9.6% expansion in property sales in CY24, primarily driven by increased contributions from IOIPG's Singapore projects. Considering the sector’s 1Q24 sales performance and new launch lineup for 2H24, we believe developers are on track to achieve their 2024 sales target. For CY25, we expect property sales growth to moderate to 5.3%. While the growth rate is anticipated to slow in CY25, the absolute value of property transactions is expected to remain at record levels.

On average, the visibility of unbilled sales for developers under our coverage exceeds a 1x cover ratio of last FY's property development revenue. Overall, we foresee continued expansion in EPS growth of 16.8% in CY24, building on the encouraging 15.8% EPS growth recorded in CY23. This growth is supported by significant recognition from overseas projects, a return to normal domestic construction progress, and substantial earnings from land sales. Moving into CY25, we expect EPS growth to taper to 9.2% due to the high base effect.

Finally, in addition to posting stronger sales and profits, we are also seeing other activity that suggests that developers are feeling more confident. During the first half of 2024, there was a notable surge in land purchases, with developers with deep war chests snapping up land banks in strategic locations. This buoyant activity reflects their optimism about the property market's recovery in the coming years. According to NAPIC statistics, development land transactions have notably accelerated recently - see Figure 10. In 1Q24 alone, there were 6,712 transactions amounting to RM4.7bn (+49% YoY), up from 6,062 transactions valued at RM3.1bn in 1Q23.

Moreover, transactions for agricultural land have also seen a robust increase, with 21,420 transactions totalling RM6.2bn (+64% YoY), compared to 18,846 transactions valued at RM3.8bn in 1Q23 – see Figure 11. As vast tracts of land in the outskirts retain their agricultural title, this trend underscores developers' growing confidence in acquiring such land for township development as part of their expansion strategies.

Overweight Stance Maintained

All in all, we maintain our Overweight stance on the property sector, anticipating it to be a primary beneficiary of increased domestic activities, driven by a surge in infrastructure projects and investments. We have Buy calls for all developers under our coverage.

Incorporating ESG ratings into our target prices, we have added a 5% premium for 5-star ESG ratings (SIMEPROP and SUNWAY) and a 3% premium for 4-star ESG ratings (IOIPG, SPSETIA, and MAHSING). No adjustments have been made for GLOMAC, IBRACO, and PARAMON, given their 3- star ratings.

Top Buy Picks for the Sector Are IOIPG, SIMEPROP and IBRACO.

IOIPG (TP: RM3.10. ★★★★) stands out as one of our top buy picks due to its strategic position in the thriving Johor market. It owns an extensive undeveloped landbank of 3,868 acres or 74% of the total undeveloped landbank (GDV: RM7.9bn or 12% of total GDV) and an additional 1,500 acres of non-core lands in Johor. Additionally, IOIPG's property investment division is expected to drive future revenue growth, with a projected 32% increase in FY25 and 19% in FY26, supported by the strong performance of its existing assets such as IOI City Mall Phase 1 & Phase 2 and the upcoming completion of Central Boulevard Towers in Singapore. The division's contribution to revenue is anticipated to rise significantly from 19% in FY23 to 28% by FY26. Furthermore, the potential establishment of a Real Estate Investment Trust (REIT) could unlock significant value from IOIPG's RM18bn investment properties, enhancing the company's financial flexibility and balance sheet. Our valuation is based on P/Bk multiple of 0.7x against its CY25 BPS, slightly below the stock’s peak valuation of 0.71x since its listing in 2013 and a 3% ESG premium incorporated into our TP.

We also like SIMEPROP (TP: RM1.98, ★★★★★) due to its strategic transformation under the SHIFT25 strategy, leading to diversification and expansion beyond property development. This includes the significant milestone of closing the Industrial Development Fund 1 (IDF-1) at RM1bn, as well as the upcoming build-lease data centre at Elmina Business Park to boost recurring income. SIMEPROP is also a leading player in Malaysia's industrial real estate sector, benefiting from the government's New Industrial Master Plan 2030 and increasing demand for industrial space, with a notable rise in industrial property sales. Furthermore, the group’s strong execution capability has consistently met KPIs, as evidenced by a gross margin of 31% in 1Q24, a robust financial position with net gearing at 24%, and impressive progress towards surpassing its FY24 sales target of RM3.0bn. We raise SIMEPROP’s TP to RM1.98 from RM1.57 previously. This new valuation, pegged at 1.2x CY25 BPS (previously 1.0x), aligns with the sector’s peak valuation during the last upcycle. We also ascribe a 5% premium for SIMEPROP’s 5-star ESG rating. As Malaysia's largest developer by landbank, SIMEPROP demonstrates exceptional execution capability, agility, and flexibility in rolling out residential and industrial products that cater to evolving market needs. Given these strengths, we firmly believe SIMEPROP is the prime proxy to capitalise on the current sector upcycle.

Despite its small market capitalisation and asset size, Ibraco (TP: RM1.33, ★★★) is a compelling top buy pick due to strong earnings visibility with a projected 5-year CAGR of 24.2% to RM69.5mn, supported by unbilled sales of RM209mn and a construction order book of RM1.2bn. The company's conservative sales target of RM400mn for FY24 is likely to be surpassed, given robust demand and planned launches worth RM1.6bn. Ibraco is also wellpositioned to benefit from Sarawak’s infrastructure boom, with a proven track record and potential involvement in significant projects such as airport expansions, water supply grids, and green hydrogen production plants. Furthermore, Ibraco’s strategic vertical integration into the supply chain of essential building materials, including quarry operations, steel pipe manufacturing, and ready-mix concrete, mitigates raw material price fluctuations, enhances long-term earnings, and ensures quality control, making it a strong investment candidate.

We upgrade Ibraco ESG rating to ★★★ with a score of 49.8% (previously 39.7%). This improvement reflects consistent advancements in ESG disclosure and adoption over recent years, guided by frameworks such as the Bursa Malaysia Sustainability Reporting Guide, Task Force on Climate-related Financial Disclosures and United Nations Sustainable Development Goals. All three pillars saw improvements, with the Environment Pillar exhibiting the strongest advancement, rising to 45.6% from 31.2%. This progress is attributed to the group's efforts in reporting and monitoring energy and greenhouse gas emissions (Scope 1 & Scope 2 carbon emissions), water management, and renewable energy use. Additionally, clearer environmental policies and targets have been set to ensure continued progress at Ibraco towards realising the Net Zero Carbon 2050 goal. Meanwhile, the Social Pillar and Governance Pillar scores have been upgraded by 6.9 percentage points and 9.4 percentage points, to 55.4% and 48.4%, respectively. These improvements are largely driven by a widening scope of reporting, continued enhancements in stakeholder satisfaction, achieving 50% female board representation, and regular engagement with the investment community through investor briefings. These efforts demonstrate Ibraco's commitment to good transparency and disclosure practices. We maintain our TP of RM1.33, based on SOP valuation.

Key risks to our sector recommendation include 1) cost escalation due to rising raw material prices and potential minimum wage hikes, 2) subsidies rationalisation that increase cost of doing business and reduce consumers’ purchasing power, 3) unexpected imposition of harsh tightening/cooling measures, and 4) unresolved affordability and overhang issues.

Source: TA Research - 9 Jul 2024