Early bird catches the worm (Property industry focus by HWANGDBS Vickers Research; April 4, 2011)

While track record is important, we see owners of large landbank near potential MRT interchanges (or strong deal-makers) having an upper hand given scarcity of prime land in KL, and there should be no short of suitors to minimise execution risk. Strong overseas track record may give an added advantage in attracting foreign demand (eg YTL’s Sentosa Cove, Guocoland Group’s following in Singapore & China). MRT and plot ratio expansion will strengthen the case to speed up development of raw landbank and help realise RNAV faster.

PEMANDU aiming high

We recently met up with PEMANDU, the government arm spearheading Malaysia’s economic & government transformation programs. Key highlights:

- PEMANDU has identified RM127bn worth of investments to date, ahead of its 2011 target of RM83bn and 10th Malaysia Plan average of RM115bn p.a.

- 60 entry point projects entitled to fast-track approvals worth RM95bn (including Guocoland’s RM2bn Damansara City mixed development) have been inked so far, with more in the pipeline. 35% of these are already off the ground.

- 92% of funding will be sourced from the private sector, while public funding will focus on catalyst projects whereby Greater KL will be the single largest at 60%. MRT funding will be via a special purpose vehicle under Ministry of Finance (not Prasarana given its stretched balance sheet).

- Greater KL initiatives are aimed at improving KL’s ranking to Top 20 most liveable and economic growth cities in the world by 2020 (currently ranked 79/130 in quality of life survey).

Initiatives proposed include:

a) Foreign magnet: Attracting 100 of the world’s top MNCs & highly-skilled immigrants;

b) Improved connectivity: High-speed rail to Singapore, integrated urban rail system;

c) New attractions: Rejuvenation of rivers, greener KL, iconic places; and

d) Enhanced services: Pedestrian network, solid waste management.

- PEMANDU expects Greater KL population to balloon to 10m by 2020 from 6.5m (4.4% CAGR, with foreign talent base to grow from 9% to 20%), creating demand for 1m new

homes. GNI per capita is targeted to grow to RM70k from RM40k presently (5.8% CAGR).

- On the RM48bn MRT, more details may be unveiled in Land Transport Commission (SPAD)’s Urban Rail Network Plan in Apr 2011. We expect consultant Halcrow Group to revert on the Circle Line by 2Q11 and Orange Line (Ampang-Klang) by end-2011. We do not discount the possibility of positive surprises during the Invest Malaysia conference in Apr 12-13 (including potential approval for Circle Line).

- The public display for MRT Blue Line (Sungai Buloh-Kajang) kick-started in Feb 2011 (to last till May 2011) while the Environmental Impact Assessment report completed in Mar

2011. McKinsey was recently appointed to undertake a Value Management Study on the alignment and station locations to ensure cost efficiency. Prasarana (MRT owner-operator) has indicated that it will follow Hong Kong’s rail+property model to help fund capex and opex, which could see the development of 5-10 sites via JVs with developers to minimise execution risk.

- With pre-qualifying process initiated, the first construction tender may be called this month with break-ground on track for Jul 2011. Land acquisition should be minimal as MRT will hug major highways (making use of government reserve land). MRT Blue Line is expected to be completed by 2016 while Circle & Orange Lines by 2020 (although construction may be done concurrently to minimize costs and delays).

- As for the RM10bn KL-Singapore bullet train, an 8-week feasibility study is currently being undertaken (expected to cut travelling time by 50-63% to just 1.5-2 hours).

- All these measures to transform Malaysia into a high income nation and improve KL’s liveability & vibrancy should augur well for KL properties which we expect to scale new heights over the next 3-5 years

Positive outlook on residential & retail segment We also met up with property consultants to discuss on sector trends and outlook. Key highlights:

- Full support for MRT as improved connectivity could lead to emergence of new commercial developments, suburban townships, and urban renewal (but possible hollowing out of

less well connected areas). KL Golden Triangle may expand to include key government projects such as KL International Financial District, Bandar Malaysia (existing Royal Malaysia Air

Force base) and Warisan Merdeka in future.

- Most agreed that Circle Line is the most important line as it integrates all existing railway infrastructure in KL. We expect prices of properties close to interchanges at the city fringes ie Sentul, Pusat Bandar Damansara, and KL Eco-City to appreciate the most.

- Properties near MRT stations tend to fetch 20-30% premium based on case studies. “Is the project near a MRT station?” could well be a FAQ soon.

- As for 2011 sector outlook, residential landed properties could see 10-15% price growth driven by scarcity of land and higher input costs. This is slower than 2010’s 15-25%, due to a higher base and increased supply (should be well absorbed given strong underlying demand for landed properties & accommodative bank lending).

- High-rise developments will likely continue to see lackluster rental growth due to large incoming supply (especially in KLCC and Mont’ Kiara). Capital values however are bottoming out (still 20% below peak), although foreign buyers have yet to return in a big way (rising enquiries).

- Niche developments such as Binjai On The Park luxury condos (with unobstructed view of PETRONAS Twin Towers & KLCC Park) is expected to continue to be the price setter, with recent transactions hitting RM3000psf (+15% y-o-y) and rentals of RM8psf. We also expect keen interest for properties near potential MRT interchanges, as seen from the strong demand for Capers@Sentul East and KL Eco-City launches recently.

- Klang Valley retail segment should see strong rental growth based on recent lease renewals (+10-30%) and improving retail sales. Occupancy rate is averaging ~85% while incoming supply is mainly at the suburbs (mostly pre-let).

- There is a general concern over the large incoming supply of office space in KL which could further dampen rental and push up vacancy rates. Office rental growth has been flattish in 2010 while average occupancy rate has fallen marginally by 1ppt to 92% in 4Q10. The successful implementation of ETP will help attract private and foreign investments which should help boost demand for new office space.

Anectodal evidence suggests demand remains robust

While we believe the 70% loan-to-value cap managed to cap speculative activities to a certain extent, the strong underlying demand from first-second home owners and upgraders continued to support property sales, even at new benchmark prices. Recent launches saw strong take-ups:

- Capers @ Sentul East condos (>90% booked at RM600psf); - Sime's USJ Heights Indigo zero-lot bungalows (75% sold at RM2.0-3.3m/unit);

- Gamuda's Ambang Botanic, Klang semi-d and bungalows (>90% sold at RM1.5-1.8m/unit);

- Glomac Damansara serviced apartments (70% sold at RM600psf). SP Setia sales (predominantly residential) for Nov 2010-Feb 2011 achieved a record 4M high of RM953m (+25% y-o-y). SP Setia is well on track to achieve its FY11 target of RM3bn (30% growth from 2010’s RM2.3bn).Commercial property launches also saw warm response in 1Q11:

- SP Setia’s KL Eco-City boutique and strata offices (83% & 100% booked at RM1000-1100psf respectively);

- Sunway City's Nexis shopoffices in Dataran Sunway (60% sold at >RM4m/unit);

- Sunrise Summer Suites strata offices in KL Golden Triangle (95% @ RM670psf) This supports our view that property demand should remain resilient, albeit slower growth (2011F: 10% vs 2010E: 35% due to low base), supported by positive macro factors (young population, robust economy, inflation hedging, urbanization, shrinking household size, accommodative bank lending).