Research  
Is The Property Sector Bottoming? August 3, 2017
In this article, we will be discussing on some of the potential catalysts and threats that are lying ahead of the local property sector.
Author : Jerry Lee Chee Yeong


Is The Property Sector Bottoming?

Is The Property Sector Bottoming?

Following the various cooling measures implemented in the late 2013, our local property sector had posted 3 consecutive years of negative return. On top of that, the number of property transactions has also been trending downward since the implementation of the various property cooling measures (see figure 1). However, after stepping into 2017, the Bursa Malaysia Property Index posted a decent return of about 13.7% as of 25th July 2017 (see figure 2), outperforming the broad market index as represented by the FBM KLCI Index by about 4.2%. With the strong growth in Malaysia GDP for 1Q’17 coupled with the expectation of improving global economic conditions, investors might be anticipating a rebound in the local property market. Hence, in this article, we will be discussing on some of the potential catalysts and threats that are lying ahead of the local property sector.

Chart 1: Number of Property Transacted

Chart 2: Bursa Malaysia Property Index

Corporate actions likely to galvanize the property sector

2017 would be a busy year for property sectors as the calendar is packed with several corporate actions such as SP Setia’s proposed acquisition on I&P Group Sdn Bhd and the Sime Darby property demerger.

Following the acquisition of I&P Group Sdn Bhd, the landbank of SP Setia will increase by 80% to about 10,000 acres specifically in Klang Valley and Johor. Therefore, this is likely to enhance the market position of the company. According to the SP Setia President, their target (I&P Group) has a strong balance sheet with a low debt level. Consequently, this will provide an excellent platform to stimulate future growth for SP Setia.

Moreover, the demerger of Sime Darby property is expected to unlock the value for the company as the investors will traditionally attach a discount to a conglomerate company. Reason being a single industry specialized company will appear to be more nimble, transparent and the comparison against its peers can be made easily. Hence, the demerger of Sime Darby property is likely to unlock the asset value of each core entity as the valuations will appear to be more attractive being a pure play entity rather than a conglomerate.

Increasing loan applied/ approved

According to the Bank Negara Malaysia Monthly Statistical Bulletin for April 2017, the numbers of loan applied and loan approved (Jan’17 to April’17) for the purchase of property has increased 13.2% and 8.8% as compared to the same period in 2016 (see figure 3 & 4). The loan approved for purchase of property has posted four consecutive months of positive growth (on y-o-y basis) which suggests a trend of improving sales for the local property developers. The total approved loan for property transactions can be used as an indicator to gauge the overall property transactions value which will eventually translate into the sales of property developers. As a result, with the increasing total loan approved for property in 2017, which recorded at RM 39.1b, the sales of local property developers are likely to grow further in 2017.

Chart 3: Loan Applied for Purchase of Property

Chart 4: Loan Approved for Purchase of Property

Improving consumer sentiment Index while household debt remains high

The MIER Malaysia’s Consumer Sentiment Index (see figure 5) has improved to 80.7 in the second quarter of 2017, gaining 2.2 points and 4.1 points on year-on-year and quarter-on-quarter basis. Although the local consumers are generally more optimistic about the economic condition as compared to the previous quarter, they continue to remain cautious amid the worries of external headwinds continuing to challenge the country’s economy. Despite the improving index on y-o-y and q-o-q basis, it is still hovering below the 100-point threshold level of confidence, indicating a generally weak consumer sentiment. However, we believe that the consumer sentiment is likely to further improve in the following quarters given the various strong economic data in the first quarter on 2017 and the strong rebound in Ringgit, which might enhance the consumer confidence. On the other hand, according to Bank Negara Financial Stability report 2016, Banks’ outstanding housing loan further expanded by 9.1% in 2016 and this continues to be the main driver of Malaysia’s household debt. As a result, the increasing household debt (88.4% to GDP ratio) (see figure 6) will continue to pose a challenge the local property market, despite the expectation of further improve in consumer confidence.

Chart 5: MIER Consumer Sentiment

Chart 6: Household Debt to GDP ratio

Rising supply will put pressure on new property launches

One of the threats that might dampen the recovery of the local property sector will be the 15-year high incoming supply in the real estate market for residential properties (see figure 7). Although the demands for the local properties have been improving since the first quarter of 2017, which have been shown by the escalating properties loan applied and loan approved – thanks to the relatively young population (median age of 28.5), the rising supply of residential properties looks alarming for the local properties sector. Consequently, the potential of property price appreciation will be abated due to the intense competition and rising incoming supply, which has been reflected in the slower property price growth over the past few quarters (see figure 8). As such, some of the property investors who are actively looking for handsome capital returns might be discouraged by the subdued capital appreciation in coming years. Ultimately, this would translate into a lower profit margin for the local developers as demand soften.

Chart 7: Incoming Residential Property Supply

Chart 8: Quarterly HPI Growth

Challenging outlook for high-end properties

In addition, according to a Khazanah report, the median income for Malaysia household stands at RM 4,585 per month. As such, the affordable housing price for majority of Malaysian will be ranging around RM 600,000 to RM 700,000, assuming the applicant has no existing loan commitment. Therefore, we believe that the high-end property developers might have a challenging outlook in the coming years. This can be observed from figure 9, where the property with value above RM500k and RM1m saw decline in the value transacted while the properties with value ranging between RM400k-RM500k saw recovery last year.

To make the matter worse, China’s implementation of capital controls policy that restricted the capital outflow for purchasing of properties have impacted the local property sector, especially on the high-end property projects. One of the major victims will be I-Bhd, namely 8Kia Peng project, which targeted foreign buyers particularly from China. This has resulted in a poor take-up rate of only 10% even though the project is 17% completed. As a result, the outlook for the high-end property developers remains challenging due to soft local and foreign demand.

Chart 9: Growth in Transacted Property Value by Sub-sector

Conclusion

On valuation front, although the Bursa Malaysia Property Index was trading at forward PB ratio of 0.83x as of 25th July 2017, below its historical average of about 1.0x, we believe that the general outlook for Malaysia property sector remains lackluster, given the challenging prospect for the high-end property developers. However, with the relatively younger population coupled with the expectation of improving consumer sentiment in the following quarters of the year, we might see an ameliorating condition within the affordable housing developers. As such, we remain a neutral view on the local property sector but are selectively positive on the outlook on property developers with affordable housing projects.

Chart 10: Valuation for Property Sector


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