Uncertainties prevail. We remain UNDERWEIGHT on the property sector (developers). We expect the property market to be hard hit by the new property cooling measures of Budget 2014 and by some state governments. Stricter mortgage lending by the banks will also slow new transactions. Already, developers have expressed caution on the property market outlook over the next six months and are switching their product focus to affordable housing where demand is still resilient supported by a young demographic. Our pick for the sector is Glomac.
2013: A highly volatile year. Gains in share prices of listed developers were short-lived post-13GE, no thanks to the exodus of foreign funds out of the Asian region on US tapering fears. The sector was further hit by drastic property cooling measures announced in Budget 2014. Post-Budget 2014, the Johor and Penang state governments have also imposed additional state-specific measures to cool their local property markets. As a result, the KL Property Index (KLPI) has retreated by 16% (vs. KLCI +4%) from its peak in end-May 2013.
New cooling measures negative for demand. Buying interest (especially on luxury and highly speculative properties in the hotspots) has been dampened by the new property cooling measures, which will come into effect in Jan 2014. We gather that the response to UEMS‟ recently-launched Almas Suites and WCT‟s Medini Sinature Tower 2 has been lukewarm. Given the uncertainties in demand, Glomac has cut its internal sales target for FY4/14 by 18% while SP Setia has for the first time refrained from committing to a sales target for FY10/14.
Competition heating up in Iskandar Malaysia. Competition is also intensifying with the entry of Chinese developers into Iskandar Malaysia. Guangzhou R&F Properties has recently acquired 116 acres of land in Johor Bahru from the Sultan of Johor. We are concerned that these developers will deluge the market with a massive supply of high-rise mixed development projects, inducing price volatility, if there is no synchronized planning and control by the authorities.
Earnings downgraded, TPs cut. We lower our FY14-16 earnings forecasts by 3-24% to factor in: i) lower sales assumptions due to the deferment of high-end/high-rise launches and ii) lower pre-tax margin assumptions (-2ppts) for projects launched between end-2011 and 2013, to factor in higher construction costs. We have also updated our beta assumptions and roll over our base year for valuations. Consequently, we adjust our RNAV estimates by +1.6% to -5%.
Maintain UNDERWEIGHT; Glomac is our preferred pick. Our new TPs are based on unchanged P/RNAVs of 0.5-0.79x. We continue to rate Sunway and UEMS as SELLs; SP Setia and Mah Sing are HOLDs. We upgrade Glomac to BUY as the stock now offers a total return of > 10%. Glomac‟s valuations have turned undemanding and its large exposure to affordable housing makes it less vulnerable to policy risk. Also, most of its landbank is located in the Klang Valley, making it a prime beneficiary of the growing population and infrastructure improvements there.
Final push for sales. Developers are in the final push for sales before the implementation of the new property cooling measures in 2014. In our recent survey, we found that developers are offering very attractive marketing packages including discounts/rebates of up to 15-17%. To our surprise, the entitlement for mortgage loans is still based on gross pricing, despite the enforcement of stricter loan-to-value ratios by BNM since Nov 2013. The enforcement of new rulings in 2014, when developers must fully disclose any rebates/discounts offered, should make it harder to attract buyers with marketing gimmicks in future.
The losers. With several cooling measures implemented at one go and stricter mortgage lending by the banks, we think the property market will be hard hit as we expect speculators to hold back on new commitments. Developer interest bearing scheme (DIBS)-driven luxury and highly speculative properties in the hotspots would be impacted the most. Developers with large exposure in these segments/areas are UEMS, Sunway, E&O (Not Rated) and Tropicana Corp (Not Rated).
The less-affected developers. The new measures are however unlikely to significantly deter real property demand, which will be supported by owner-occupiers and a young demographic. Bigger players such as SP Setia and Mah Sing have started switching their focus to the affordable home segment, to ride on the current strong demand especially for affordable landed properties. Other developers with large exposure to this segment are Glomac, Hua Yang (Not Rated), Matrix Concepts (Not Rated) and Tambun Indah (Not Rated).
KV infrastructure, government land boost. In 2014, investor interest could return to developers with exposure to the Klang Valley (KV) on news of government land awards, such as the RRIM land in Sungai Buloh (probably in 2Q14). The KV MRT 2 and Circle lines (Gamuda expects the MRT2 line to be approved by early 2014, with construction to start in 2H16) are re-rating catalysts for land prices in the Klang Valley. This could offer trading opportunities in government-linked developers such as SP Setia, IJM Land, UEMS and MRCB.
Margin erosion. The GST implementation on 1 Apr 2015 will most likely raise construction costs. While developers are able to pass on the GST impact to buyers of non-residential properties, they may have to absorb some of the GST impact (in the form of margin compression) for residential properties that were sold recently and remain uncompleted come 1 Apr 2015.
Under the radar – Focal Aims-Eco World. Eco World (EW) has been in the limelight after the buyout of Focal Aims (FA). The buyout effectively makes FA the listed vehicle for EW. To recap, EW is a fast-growing developer, led by former top managers at SP Setia. It has accumulated 3,000 acres of land (worth MYR30b in GDV) throughout Malaysia in less than a year. It is currently undertaking a restructuring exercise that could involve strategic landbank injection into Focal Aims (probably by 2H14), we understand.
Publish date: 23/12/13