Property sales for 9M22 were encouraging despite the expiry of the Home Ownership Campaign (HOC), rising inflationary pressure and multiple rounds of interest rate hikes in 2022 with the 9M22 aggregate property sales being flat from that of last year’s numbers, which were very much boosted by the HOC then.
Meanwhile, 3Q22 aggregate property sales were also flat quarter on quarter (QoQ).
RHB Research stated today (Jan 4) that they were somewhat surprised by the strong momentum, as sentiment in 2Q22 being more favourable due to the spending stimulus from the MYR10k Employees Provident Fund withdrawal scheme, and expected the effect to die down in 3Q22.
The research house (RHB) was rather conservative in the past, in view of the macroeconomic challenges and timing of GE15. “We attributed the strong property sales to the positive sentiment arising from the re-opening of the economy and, as such, the prospects of stronger economic growth in 2022. Some developers think that it was also because of the “fear” of buying more expensive properties in the future, given the rise in building material costs.
Therefore, these have supported the demand for properties despite higher mortgage lending rates in 2H22.
To a certain extent, demand may have also been lifted by the Government’s i-MILIKI scheme, whereby full stamp duty exemption was offered to first-time home buyers for properties priced up to MYR500,000, and there was a 75% discount on the stamp duty for those buying properties priced from MYR500,000 to MYR1m. This incentive is for sale and purchase agreements completed up to Dec 2023.
Expect 5-10% growth in property sales
Going into 2023, RHB expects a decent 5-10% YoY increase in property sales, compared to 38% (aggregate sales) growth in 2021 and an estimated 0-3% YoY growth in 2022. “While most developers retain their cautious view on the demand for property, we think the property sector in Malaysia will start a new cycle from 2023, with mid-single digit growth in the early stage, then possibly reaching double-digit growth when new economic policies take effect in a few years.
Likewise, we expect house prices to have similar growth patterns. The House Price Index (HPI) growth has been sluggish in the recent 3-4 years, weighed down by a prolonged supply glut in the residential and other sub-segments in real estate. Going forward, we expect property prices to possibly register a mild growth of 2-3% YoY in 2023, from the lows of 0.7% YoY in 3Q22 and 1.9% YoY in 2021.
Meanwhile, the overhang of units in residential property have started to moderate somewhat, as 3Q22 saw a contraction of 2.7% vs a YoY growth of 9.6% in the previous quarter. While we are not sure if the easing momentum will continue over the near term, we do believe that, as economic growth picks up again and market sentiment improves, the new demand will also help to absorb the oversupply units in the market gradually.
The pace of interest rate hikes to slow in 2023
“We think the interest rate upcycle may possibly near an end in 1Q23/2Q23. With much of the rate hikes likely frontloaded, the pace of increase (in interest rates) is expected to decelerate in 2023.
The US Federal Reserve raised the target range for the Fed Funds Rate by another 50bps to 4.25-4.50% during its Dec 2022 meeting. This is the seventh consecutive rate hike this year. In tandem with the steep rate hike in the US, Bank Negara Malaysia (BNM) has correspondingly raised the benchmark interest rate by 100bps in 2022 (up 25bps each time in May, July, September and November) – raising the OPR to 2.75% from 1.75%.
Looking at the valuations of many property stocks over the last 3-6 months, we believe the sector should have already factored in the negative impact arising from the interest rate hikes. Based on our checks, the market generally expects another 25-50bps increase in the OPR in 1H23. This is favourable to the property sector, as the aggressive increase in mortgage rates is now likely behind it. Currently, mortgage rates for most banks range around 4.0-4.1%, which is still slightly below the 4.5-4.6% levels recorded prior to the pandemic.
Risk of political uncertainties is decreasing
The Bursa Malaysia Property Index’s (KLPRP) hit its recent low in mid-Oct 2022, as the sector was trading at around a 72% discount to RNAV (vs discounts of 65-66% in 2Q22), just before GE15 was called. This (overhang or sell-down) is in line with the historical trend, given the near-term uncertain political landscape.
Based on the performance of the FBM KLCI and USD/MYR rate, the conclusion of GE15 seems to have provided the market with fresh catalysts. Given his vote of confidence in Parliament in Dec 2022, Malaysia’s new Prime Minister Datuk Seri Anwar Ibrahim is now in a stronger position in terms of policymaking. While we are still not sure about the details of the potential economic reforms that the new government will roll out over the next 6-12 months, we do think that the market has relatively high expectations on economic growth ahead with a stronger inflow of foreign direct investments that should benefit the property sector indirectly.
On the ground, we gather from some developers that proposals on lower requirements for the Malaysia My Second Home (MM2H) programme will be submitted to the Government.
If the programme is revived, we think UEM Sunrise and Eastern & Oriental will be the prime beneficiaries – the Iskandar and Penang island property markets are typically the favourite spots for foreign property purchasers and retirees. At the same time, some stakeholders are also hopeful that lending guidelines will be relaxed to encourage affordable housing ownership.
Property, a high-beta sector, with depressed valuations may outperform
As the equity market sentiment improves, with expectations of some meaningful economic reforms ahead, we expect the high-beta property sector to also outperform, especially given its current depressed valuations. Despite the recent rebound post-GE15, the sector is still trading at close to -2SD levels.
In our view, the sector has likely fully priced in the negative impact of labour shortage issues, interest rate hikes and rising inflationary pressure. The concerns on some of these issues should be over very soon, as developers/contractors will start receiving new batches of foreign workers in a few months. We are also encouraged by the fact that the property sales momentum has not weakened much, despite the unfavourable macroeconomic factors in 2022. Hence, downside risks to developers’ earnings should be mitigated going forward.
Indeed, a high number of real estate companies under our coverage reported earnings that beat expectations during the recent 3Q22 results.
China to ease lending restrictions on property sector and COVID-19 safety measures
Regionally, the Chinese Government has asked banks to stabilise lending to property developers and construction firms. The country’s real estate sector went through a challenging period over the last 1-2 years as some developers experienced bond defaults that shook the financial and real estate markets, while delays in project delivery have prompted property buyers to stop their mortgage repayments.
The recent movement to support the real estate sector also include the extension of existing real estate development loans and trust loans, as well as some regulatory policy support to ensure the timely delivery of housing projects. Although not many local developers have sizeable exposure to the China market, we think the easing of financial restrictions is timely to alleviate investor fears over a potential slump in China’s real estate market.
In addition, the Chinese Government’s signal to soften its stance on the zero-COVID policy has been viewed favourably, as this should re-instate economic growth in the region. The impact can be quite significant, as the return of China tourists will not only boost the local hospitality and retail sectors, there could be a positive spillover to the property sector as well.
The property markets in Penang and Iskandar, to a certain extent, do rely on the demand from foreign buyers, especially the high-end segment.
RHB: Valuations and stock recommendations
The property sector rebounded by 5-6% in Nov 2022 after GE15, compared to the FBM KLCI’s 2%. We think the sector should undergo a further re-rating, given the reasons mentioned earlier. The sector is currently trading at a c.71% discount to RNAV, which is still close to -2SD levels. As we expect a more sustainable recovery (for the sector) in the coming years, we believe the market has yet to factor in the improvement in property sales and earnings prospects of developers.
Prefer developers with diversified exposure. In order to fully capture the full re-opening of the economy as well as the gradual easing of COVID-19 safety measures in China, we like developers with diversified business exposure. To be specific, we like developers with sizeable property investment assets. As demand for property tends to be cyclical and more sensitive to policy changes, companies with retail malls and hospitality assets are expected to benefit from the return of foreign travellers and resilient domestic tourism. Both IOIPG and Sunway have recently opened their new retail malls, and the pipeline of investment properties should strengthen their recurring income further.
Developer Top picks
IOI Properties. We like the company for its sizeable pool of investment properties. As at FY22 (Jun), IOIPG has >MYR5bn worth of investment properties, with 7.1m sqf of NLA. The segment contributed around 15% of EBIT last year, and we expect the contribution to be even more significant in the coming years, ie FY24-25 – given the recent opening of IOI City
Mall Phase 2 in Putrajaya and the rental commencement of IOI Central Boulevard Towers in Singapore from 2HFY24 onwards. For the property development segment, the gradual reopening of China’s borders and economy should be favourable for the company’s project in Xiamen.
Sunway. Sunway’s strategic exposure to various businesses should enable it to fully capture the benefits of the broad re-opening of the economy. The gradual easing of China’s zero-COVID policy should encourage Sunway to restore the launching date of its Sunway Gardens project in Tianjin into its schedule of events in 2023 (it was held back in 2022).
Although not a direct play, Sunway’s 54%-owned Sunway Construction (SCGB MK, BUY, TP: MYR2.07) recently inked an interim EPC agreement for a power plant in Vietnam. This MYR10bn contract (more specifically, MYR6bn for Sunway Construction, given its 60% stake) may boost the construction firm’s outstanding construction orderbook to a record high of MYR10bn. Meanwhile, Sunway is also at the forefront of ESG, with our in-house derived score of 3.40 – the highest among the developers in our coverage universe.
The group, as a whole, has put in a lot of effort in driving sustainability, as well as in achieving net-zero carbon status by 2050.
