Sep 23, 2015

Property Sector Outlook

On Hibernation Mode

Sentiment remains sour. The prolonged demand softness due to deteriorating affordability and more stringent lending continue to weigh down the property sector. Sales growth therefore has slowed down with several developers already toning down their sales target from the beginning of the year.

Stringent Lending. Loan application growth for residential properties continued to downtrend this year with the growth in July declining by -3.3% YoY. Worryingly, loans approval growth for residential properties was lower at -17.8 % YoY which is signaling that lending is stricter and hence, could further crimp property demand with the dearth of financing.

Negative Wealth Effect. The current weak equity market would discourage property buying further, given the correlation between the property transactions and stock markets. With recent downgrade of our year-end target, our house is now expecting the FBM KLCI to end at 1,740 (from 1,830 previously) i.e. roughly Proeflat performance YoY. Current index is hovering at 1,600 levels, or trading lower at c.-10% YoY.

Property prices to stay firm. Despite the tough operating environment current, we are still of the view that the chances of collapse of property prices are minimal. Barring any exogenous shocks, we believe property prices will stay firm as evident by the average of 10.6% over the last 3 years. Hence, we believe the asset value for property companies’ i.e land and investment assets is still intact. Also, the price drop was quite mild in the recent 2008-09 Global Financial Crisis whereby residential property demand dropped by -2% after the stock index lost -37%.

1H2015 sales performance. In general, most developers are still seeing revenue growth in 2Q due to the healthy unbilled sales and hence, we believe the 2H2015 revenue should remain encouraging. Also, we note that property launches are now smaller in size in view of the challenging market and focus is also on landed properties in the affordable segment.

Maintain Overweight. Admittedly, the turn of event which saw the weakening of Ringgit and struggling stock markets caught us by surprise. Hence, we believe that purchase of big ticket items such as properties will take a back seat for now, given the negative wealth effect and cautious sentiment. That said, we believe that property stocks are trading near undeserving distressed valuations. By looking at recent peak and trough price to book value, the downside from current sector valuations is c.30% but the upside is c.77%, offering an attractive risk-to-reward proposition. As for our coverage, we continue to stick with companies that have low holding costs I.e. cheap landbank and strong balance sheets. With some trading even more than 50% discount to book value, we believe holding the stocks would give investors exposure into real assets cheaper than physical properties which should move up in tandem with inflation in the long run. That said, current sour sentiment could stay longer than expected but with current prices, investors are getting c. 3% dividend yield on average.

by: PublicInvest – 23/09/15