Post date: Oct 16, 2010 9:34:3 PM
Thursday, 14 October 2010
Property
Darilvee no fb yp rloiqpueidrtiyty held
Residential demand and supply in check. Malaysia’s residential absorption rates are still below the 8-year average. Overhang rates have improved for Selangor and Johor due to stronger demand and decreasing amount of new launches. General affordability is still looking good.
All price segments are reporting improved sales, driven by low interest rates, liquidity, innovative financing schemes, high savings rates, favorable lending environments, property as a preferred inflation hedge, EPF Account 2 monthly withdrawals for the repayment of one house and pent-up demand from upgraders market.
We expect Malaysia’s residential sector to register a new record sales level of RM52.9b (+26% YoY) in 2010; large developers under our coverage, like SP Setia, IJM Land and Mah Sing Group, are reporting record high 2010 sales.
No major price bubbles. Malaysia HPI trends indicate general residential prices have grown steadily and are moving in tandem with CPI. But we do observe landed residential prices have gained momentum and we think it is confined to certain ‘hot spots’; consequently, anecdotal evidence indicates growing divergence between primary and secondary market prices. Already, some slight price corrections are observed which we think is healthy for the long run.
Nonetheless, residential prices will continue to maintain its long term uptrend since replacement costs continue to rise.
Klang Valley commercial segment’s looming supply of c.18m sf incoming supply in the medium term should limit rental growth. There is significant incoming supply for both retail and office space over next 3-4 years; retail expects another 3m sf supply in 2H10 or 13% of existing supply and there are 14.9m sf new office spaces in the next 3-4 years equivalent to 21% of existing supply.
This will add pressure on occupancy rates while potential tenants are spoilt for choices.
Potential headwinds from unfavorable government policies in upcoming Budget 2011? The government is mulling over capping LTV ratios for third property purchases onwards, progressive RPGT and cessation of IAS financings.
Out of the above, we think implementation of progressive RPGTs and cessation of IAS financings will be detrimental to property sales and sentiment.
Property stocks are ‘sales driven’. Without strong headline numbers, it will be tough for property share prices to maintain current momentum. Although 2010 residential sales value for Malaysia is estimated to be a 24% YoY increase, we expect 2011 sales to grow by 7% YoY due to 2010’s high base effect.
Developers under our coverage are waiting for clarity in Budget 2011 before determining their FY11-12 sales targets but maintain they will be able to sustain current levels.
Catalytic news flow and ample liquidity could push KLPRP index to peak cycle valuations of 1.3x PBV from current mid-cycle 0.8x PBV.
Positive news flow (e.g. MRT project) and high liquidity from inflow of foreign funds which are attracted to the stronger Ringgit are key share price drivers.
Maintain Trading BUY until policy worries abate post Budget 2011.
We are biased for a possible upgrade for the sector to OVERWEIGHT if developers under our coverage can target 15% -20% YoY growth in FY11-12 sales. Stick to developers with high news flow, which provides excellent trading opportunities.
Strong branding goes a long way as these developers are more equipped to grab market share in the event of softer demand and policy uncertainties.
We maintain 1) BUY on Mah Sing Group (TP: RM2.20) 2) Trading BUY on Eastern & Oriental (TP: RM1.26) 3) Trading BUY on Hunza Properties (TP: RM1.76) 4) HOLD on KLCC Property (TP: RM4.42 (RM3.36 if Lot C valued at NBV)). We are reviewing our SP Setia (TP: RM4.78) and IJM Land (TP: RM2.80) calls pending upcoming Budget 2011 and their guidance for FY11-12 sales targets.
Residential sector
Residential supply and demand in check. Malaysian residential absorption rate has been relatively healthy and remains below its 8-year average.
Klang Valley, which makes up 40% of Malaysia’s residential sales volume or 59% of sales value, is similarly healthy. Overhang rates continue to downtrend, particularly for Selangor and Johor.
We think overhang rates are lower due to strong demand and decreasing amount of new launches.
All residential segments doing well, given reduction in new launches over the last two years or during the financial crisis periods; it has created pent-up demand which has boosted sales for developers who are launching new lifestyle or gated and guarded community concepts.
It is truly amazing how strong sales momentum has been for Ytd-2010 even with less launches, which leads us to believe residential transactions have been concentrated in the primary market, resulting in numerous developers chalking-up record high sales.
Record residential sales for 2010. Large developers under our coverage, like SP Setia (SP), Mah Sing Group (MSGB) and IJM Land (IJML), have reported record strong sales growth in 2010, spurred by low interest rates, high liquidity and home financing schemes (e.g 5/95).
EPF Account 2 monthly withdrawals for the repayment of one house, together with the recent ‘flexible housing withdrawal scheme offered to EPF members, allows for a larger upgraders market which has boosted overall demand.
We are expecting 2010 to register residential sales value of RM52.9b (+26% YoY) and would be a new high.
Buyers have ample ammunition. Malaysians enjoy high savings rates, which incentivize banks to generously extend mortgage loans.
In general, banks have been relatively strong with low loans-to-value ratio and view mortgages as ‘safe bets’ as they are collateralized against tangible assets; of course the assumption here is the asset continues appreciating over time. Loans approval has been strong even during the recent financial crisis, and has recently made up 21%-28% of Ytd-2010 loans approved.
Average lending rates creeping-up but remains at low levels. We think trend reversal in AVL is a push factor for buyers to quickly lock-in acquisitions before AVL rises to higher levels. Also, recent ‘price wars’ amongst lenders has further fueled the excitement as 1) primary home purchases can obtain favorable spreads of BLR -2.0ppt to -2.2ppt 2) average BLR spread has hit highs of -1.08 in July 2010.
Conducive lending environments buoy property demand and upgraders market. We also understand financiers are increasing frequency of offering longer mortgage tenures of up to 40 years to younger house buyers and are increasing loan eligibility to 40% of salary vs. the norm of 1/3. It has also increased affordability, allowing for many to buy higher value homes and upgrades.
Based on our analysis (refer to assumption below), a first home owner buyer at age 30 with loan eligibility of 40% of salary would be able to afford a house priced at RM312,500, which is a 39% improvement compared to affordability at home financing terms of loan eligibility of 1/3.
General affordability still in check but signs of weakness observed.
Affordability appears healthy with our affordability index below the 10-year average.
We estimate affordability will wane slightly in 2011F given increases in house prices (assuming 10% -5% YoY increase in 2010-11 terrace home prices) and average lending rates (5.1%-5.3% for 2010-11). However, 2010-11F affordability index will still remain fairly healthy or below the 10-year average.
We think home transactions will be affected once AVL breaches 6.0%-6.2% from current 3QCY10 AVL of 5.2%, implying there is still room for growth in residential sales. We think it may take 9-12 months to see AVL rise beyond 6.0% before affordability is compromised.
No major price bubbles generally. Malaysia’s House Price Index (HPI) trends indicate general residential prices have grown steadily over the last 12 months; supported by HPI which has moved in tandem with CPI.
Demand-push prices in primary markets driven by excess liquidity in the system. With cheap money and low savings/deposit rates, many people prefer to hedge their bets with property investments in light of 1) no severe price corrections over financial crisis periods 2) volatile equity markets 3) rising inflation rates.
However, by residential segments in Klang Valley, we observed landed residential prices gained momentum.
It is not surprising since buyers are concentrating on new launches because of attractive financing schemes, whilst developers step-up launch prices by 10%-15% between each launch in less than a space of 12 months, which creates a buyers ‘frenzy’ situation. We also think this is confined to certain ‘hot spots’ which have seen new launches.
Slight price correction is healthy for the long run to preserve sustainability in demand/affordability. Slight corrections are seen in 2Q10 in terms of the landed residentials in the Klang Valley. Our checks with real estate agents indicate weaknesses are mainly from secondary markets which are seeing softer prices and demand, even for landed residentials.
We opine divergence between primary and secondary home prices are widening, brought about by the quicker price rise in primary residential prices, indicating there is a growing pool of speculators in the market. Over 2010, we see quite a few media reports reporting greater incidents of repeat buyers.
We still believe residential prices will continue to maintain its long term uptrend since replacement cost continues to rise . While we agree land and building material cost continues to rise and that developers need to price-in cost of IAS financings (e.g. interest borne over construction period), we still think the aggressive price step-ups between each phases of launch are not sustainable or healthy in the short term.
Commercial
KL office space occupancy rates declines over the last 9 months, in general, but remains above the 8-year average of 79.9%. However, 2Q10 saw slight improvements to 81.2%. We do see improvements in take-ups for CBD and suburban office spaces, and we think it is largely due to more new supply of prime office spaces and attractive rental rates, particularly for business which are expanding. Since incoming supply of prime office spaces for the Golden Triangle is declining, there is definitely improvement in occupancy rates in the area.
In Selangor, weaker occupancy rates are seen at 78.6% in 2Q10, which is below the 8 year average of 79.6%. We think it is largely due to the large incoming supply since end 2008.
Large incoming office supply to limit rental rate growth. DTZ expects some 14.9m sf (21% of existing supply) of new offices to come online over 2010-14, with majority of it coming online post 2012. As a result, rental rates appeared to be flattish whilst Grade A office spaces continue to command 6.0%-7.5%. Rental rates may weaken slightly given large incoming supply.
Retail occupancy rates weighed down by large incoming supply. Occupancy rates in KL and Selangor’s retail spaces are stable but are showing signs of weaknesses, especially for Selangor.
Although retail sales have hit a new high of RM32.9b in 2Q10, the large incoming supply has added pressure to occupancy rates.
CBRE expects another 3m sf incoming supply in 2H10 in KL, which is equivalent to 13% of existing supply. Potential tenants will target quality landlords and prime locations as the former will be spoilt for choices and will have more bargaining power in rental rates.
Any cause for concerns?
Negative headwinds from unfavorable policies. The government introduced a flat 5% RPGT for properties sold within 5 years of purchase during the previous year’s Budget. Over the year, we have toyed with the possibility of the government increasing the flat RPGT rate to 10% given the outperformance on the sector and visible price increases in primary residential launches.
Over the last couple of months, the government was seen to be mulling over capping mortgage loan-to-value (LTV) ratios; recent developments indicate LTV caps of 70-80% may possible be imposed on third property purchases onwards, which is a relief as many were concerned about blanker LTV caps. But we did say it was a healthy measure as it curbs some degree of speculative activities, which caused prices of new residential launches escalate (refer to 22/9/10 report).
It has also been rumored that the government may impose the following;
1) reintroduction of progressive RPGT (0%-30%)
2) cessation of interest absorption schemes (IAS) which is typically available with the 5/95 or 10/90 home loan schemes.
If the progressive RPGT and/or cessation of IAS home financing are imposed, we are expecting to see a slow down in property sales; if so, we expect developers to report slightly weaker sales in 2011. Introduction of LTV caps for digit growth in 2011 sales;
1) banks are extremely innovative when it comes to lending schemes
2) property investors can still buy >2 properties, since they can tap on extended families or children who are already earning. Budget 2011 may see announcement of the mentioned policies.
So far, developers decline to comment about 2011 (FY11-12) sales targets given uncertainties in government policies. However, developers maintain they will be able to maintain 2010 sales going forward.
Positively, we do not expect property prices to correct significantly, even if these measures are implemented, as many buyers/investors have strong holding powers and fire-sales will not be overly rampant as NPLs continue to be low.
Why is the government worried? We think these are the potential reasons;
♦ Ability to service loans in the future. OPR rates are expected to uptrend, meaning AVL rates are likely to move in tandem as well. In times of low interest rates, one can quite easily lock-in mortgages and service debts.
But since mortgages are typically 20-40 years tenures, uptrending interest rates adds pressures and may result in difficulty in servicing future loans which results in growing mortgage defaults. We expect another 25bps rate hike in OPR to 3.00% 2H11.
♦ Unhealthy price increases. General affordability decreases with residential prices moving-up, whilst medium term lending rates are expected to increase.
♦ Banks exposure to mortgages. If prices continue to rise without demand abating, many loans will be issued at peak prices. In the event of a ‘bubble burst’, it may cause NPLs to rise. Currently residential loans make-up 28% of the banking system loans.
At present housing NPLs are still at very low levels, although there is a slight uptick in residential NPLs for homes above RM250,000.
Budget 2011 wish list
The wish list remains similar to last year… It typically includes
1) clearer policies on unsold Bumi units, including earlier releases and no Bumi discounts for high end properties
2) greater financial incentives for developers to comply with GBI initiatives
3) first home owners grant 4) government to provide for developers undertaking low cost housing projects as the latter incurs cost as building material cost has risen
4) RM10,000 grant for first home owners to promote homeownership 5) exemption of stamp duties. We opine these wishes will unlikely be granted in the Budget 2011. The government resources are increasingly stretched, and hence, will dish out people-friendly incentives which are not too costly to the government.
Industry players also hoping for no negative policies. They hope there will be no increases in RPGTs. LTV caps should only be imposed on strategic locations which are enjoying high capital appreciation oppose to the cap on third property purchase onwards. We think there is a higher likelihood of the government imposing LTV caps on third property purchase onwards.
Our take
Residential sales growth may be flattish in 2011. As mentioned earlier, developers have not informed us of their 2011 sales targets until there is clarity with government policies; whilst 2010 will become a high base year for many.
We expected residential transaction values to grow 2% YoY to 0.24m units or 7% YoY in value to RM55.4b in 2011. We assume;
1) no negative policies
2) population growth of 1.6% YoY implying number of household growth of 2% YoY
3) similar appetite for residential properties to our estimated 2010 4) average 10%-5% rise in 2010-11 residential prices.
At cross roads? The KLPRP index is currently trading at mid-cycle valuations of 0.8x PBV. If we flash back to year 2000 property stocks were trading as high as 1.3x PBV, implying ample upside from current 0.8x PBV (Year 2000 is equivalent to Year 3 of the 10 year cycle of 1998-2007, which is the comparable time period to 2010 which is Year 3 of the new 2008-2017 cycle).
Clearly, the catalytic news flows could further fuel positive sentiments. But if historical trends prevail, peaks of 1.3x PBV seen at initial part of the 10-year property of the 1998-2007 cycle were a discount to end of previous cycle peaks of 2.7x. Currently, KLPRP is trading at 0.8x or
1) in line with post ’97 crisis averages
2) slight premium to averages post year 2000.
Have we run out of time? Based on the last 10-year property cycle (1998-2007), bull runs or ‘mini’ bull runs only lasted for 1.5 years at the most. In the current 10- year property cycle, we have noticed the KLPRP has been on a bull-run for the last 1.5 years since March 2009.
The current bull-run has definitely stretched longer than 1.5 years, and according to our technical analyst, it implies the KLPRP bullrun streak may be running out, if historical time trend prevails. However, the brief period of consolidation from July 2009 – June 2010 (1 year) may provide further legs to the KLPRP bull-run.
Are the negatives already priced-in? Even with potential negative headwinds, the KLPRP index has finally rallied, which signals one of two things;
1) expectation of no negative news from upcoming Budget 2011 2) negative policies to target a small amount of property buyers. Excess liquidity from foreign funds, driven by the strong Ringgit play, is fueling the market and property sector, being a laggard play, is finally getting attention.
Key market catalysts. Government driven projects under NKEA, like the MRT and Klang Valley River redevelopment, will be a booster to property stocks; SP Setia especially as its KL Eco City project is expected to house an MRT station, which will be close to the merged KTM and LRT stations. Other catalysts include
1) uptick
in foreign shareholding; most of the property stocks under our coverage have relatively low foreign shareholding vs. 2007 levels
2) more innovative financing schemes, which could take the form of ‘deferred payments’ schemes.
However, investors need to take note positive impact on share price from government projects may not be sustainable in the short to medium term as these are long gestation projects. Those with high news flow will provide excellent trading opportunities.
Developers with headline projects (e.g. SP Setia’s KL Eco City and IJM Land’s Canal City / The Light @ Penang) and those with aggressive landbanking and launches (e.g. Mah Sing Group) and sizeable market capitalization will present these opportunities. These developers enjoy strong balance sheet (< 0.3x net gearing) and diversified earnings base (township earnings to provide base income).
They have strong branding which will allow them to grab market share in the event of softer demand and policy uncertainties; buyers are now looking to buy into quality and the developer as it is likelier to see capital value appreciation over time.
Property stock prices are ‘sales driven’ as oppose to bottomline driven, and without strong headline numbers, it will be tough for developers’ counters to move, unless there are unique plays. Nevertheless, developers under our coverage will likely report >20% YoY growth for 2010-11; they have 1-1.5 years earnings visibility from high unbilled sales garnered over the year.
Maintain Trading BUY until policy worries abate post Budget 2011. We are also looking to upgrade the sector to OVERWEIGHT if our larger developers, like SP Setia, IJM Land and Mah Sing, can target more than 15%-20% YoY growth in 2011 sales.
Our calls
No adjustments to fair value. Most of our calls have been maintained. Those that have rallied recently to near or pass our fair values will be under review pending upcoming Budget 2011 and information on 2011 sales target.
Maintain BUY on Mah Sing Group based on our FD SoP RNAV driven fair value of RM2.20, which provides 16% upside based on last traded price of RM1.90. MSGB will be issuing convertible bonds of up to RM325m to fund potential large landbank acquisition. The issuance will eventually boost market capitalization, improve liquidity and increase number of shareholders. Mah Sing Group is expected to register 20%-25% YoY growth in FY10-11E net profit.
It is currently trading at midcycle valuations of 1.6x PBV.
SP Setia call and TP under review. SP Setia (SP) has surpassed our FD SoP RNAV driven fair value of RM4.78, based on last traded price of RM4.97, and had a Trading BUY call. Key catalysts are
1) further landbanking
2) overseas ventures
3) quicker than expected take-ups in KL Eco City project
4) stronger YoY sales.
The group is likely chalk-up 41%-11% YoY growth in FY10-11E net profit. SP Setia is trading at mid-cycle valuations of 2x PBV.
IJM Land call and TP under review. Last price of RM2.70 only provides 4% upside to our fair value of RM2.80, based on diluted SoP RNAV, and had a BUY call on the stock. However, there is potential for upgrades in calls as securing Canal City project could potentially add >10sen to our fair value.
Market speculation of privatization may continue to fuel share price. We expect 72% -12% YoY growth in FY11-12E net profit. PBV cycles are tough to determine as IJM Land
is a relatively new entity.
Maintain Trading BUY on Eastern & Oriental. Our fair value of RM1.26 providesa 5% upside to last traded price of RM1.20; fair value is based on 0.9x PBV on FY11E BV/share of RM1.40. The stock could potentially report 29%-33% YoY growth in FY11-12E net profit. Ability to commence reclamation works on Seri Tanjung Pinang 2 (740ac) will be a huge boost as land is scarce in Penang.
JV partners will be required given size of funding for reclamation. Eastern & Oriental is trading at midcycle valuations of 0.6x PBV.
Maintain Trading BUY on Hunza Properties. Although our fair value of RM1.76, based on SoP RNAV, provides 20% upside to last price of RM1.47, we remain cautious of declining profit trends. The group lacks sizeable launches in the next 2 years, which has weighed down overall share price performance.
Nonetheless, the stock does have value as at our fair value, the stock trades at 1) 6.8x vs. historical 7.6x 2) 0.7x PBV vs. historical 0.8x. Hunza Properties is trading at bottom-cycle PBV valuations.
Maintain HOLD on KLCC Property Holdings. Our fair value of RM4.42 (RM3.36 if Lot C valued at NBV), based on FD SoP RNAV, already factors for Lot C’s completion at market value.
Since Lot C is still under construction, our fair value is RM3.36 if Lot C is valued at NBV, which only has limited upside of 1% to last price of RM3.32. Share price performance continues to be capped by unclear RCULS conversion timeline; full conversion is dilutive as share base could be enlarged by 39% to 1.3b.
However, the stock should benefit from better organic growth from its quasi recurring income assets (e.g. Mandarin Oriental, Suria KLCC) on the back of recovering economic conditions.