Double Whammy For Property Developers

The operating environment for developers to remain challenging in 2023, factors leading to this belief are soft prices as reflected in a weak house price index as seen in a QoQ contraction in 3Q2022 despite the rising construction and land costs, and the still elevated household debt to GDP ratio at 85% in 1H2022.

While the loan approval rate for 10M2022 already recovered back to pre-pandemic levels of 43%, it still pales in comparison to 45-51% seen during the upcycle in 2011-2014. Meanwhile, housing affordability is eroding on the back of rising interest rates and soaring construction costs. Property developers are struggling to pass on higher construction costs to end-buyers as price hikes will hurt take-up, putting the viability of the new launches at risk. Most of them choose to sacrifice on the margins. Overhang eases but remains high. Based on NAPIC’s latest 3Q2022 publication, there was some reduction in units in circulation (which includes overhang and unsold under-construction units) against the peak recorded in

Despite the reprieve, Kenanga Investment noted that there is still a long way toward recovery as units in circulation are still
rather high versus historical levels – creating price competition and pressure for new unit launches. A bright spot in landed homes. Since the onset of the pandemic, it was noted that prices for terrace homes were the only sub-segment that have shown notable growth while prices of high-rises and detached homes have either declined or only grown marginally. Taking cue from such trend, it is believed that developers are focusing on landed townships,

Going into 2023, Kenanga said it grows increasingly cautious over developer’s high borrowings levels which would translate to higher financing costs and potential liquidity crunch. Already faced with a tough operating climate, developers’ earnings will be hurt further by the high financial leverage.

Developers under Kenanga’s coverage have all shown increased net debt levels over the pandemic, with the exception of ECOWLD and UOADEV (MP; TP: RM1.75). Overall, analysts reiterate their top picks being developers with strong cash flows that could anchor good dividends, namely, ECOWLD and IOIPG.

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