Strong pricing trends and land deals to drive NAV expansion (AmResearch property sector update April 18,2011)

Post date: Apr 25, 2011 12:36:44 PM

By AmResearch

Monday, 18 April 2011

Investment Highlights

• We reaffirm our Overweight stance on the property sector, with S P Setia and IJM Land as our deep conviction BUYs. In this report, we are raising our NAV estimates to reflect an expected reacceleration of residential pricing growth of 10% this year versus our previous forecast of +5%, given the rebound in transaction volume and higher replacement costs. We expect NAV upgrades to lead the next wave of re-rating for property equities.

• We have lifted our fair value for S P Setia from RM7.38/share to RM8.10/share – at parity to our revised fully-diluted (FD) NAV of RM8.10/share. For IJM Land, we raise our fair value from RM3.88/share to RM4.00/share – based on an unchanged 10% discount to our FD NAV of RM4.45/share. On a relative basis, we continue to expect newsflow momentum centering on presales and acquisitions to be more significant for S P Setia than IJM Land.

• Replacement costs are on the rise due to escalating land cost as well as rising prices of building materials from timber, aluminium, cement to steel. The recent aggressive bids for land surrounding mature neighbourhoods would solidify the strong pricing trends as land traditionally accounts for between 25-30% of residential prices. And, cement makers including LaFarge had just lifted its average selling price by some 6% in March 2011. The steel companies including Ann Joo and Lion Group are also guiding for higher selling prices this year.

• The expected re-acceleration in residential prices would also be preceded by a sustained expansion in transaction volume, which is already underway now. Our discussions with developers revealed that demand has rebounded strongly in the past month, as evident from the strong response to recent launches. Buyers appear to have adjusted to the 70% loan-to-value restriction on third property, paving the way for a meaningful inventory liquidation cycle to kick in.

• Against this backdrop, we expect developers to aggressively step up presales – the primary valuation driver of property equities. There are several prolific presales in the coming months at select prime neighbourhoods that may establish new pricing benchmarks, with an associated uplift to the broader residential pricing trends. Desa ParkCity is set to launch 127 units of ‘terrace’ houses – The Mansions, priced from an unprecedented RM650psf (+8%) on built-up area. At KL Eco City, S P Setia will be launching some 750 condominium units priced from RM900psf.

• Registration of interests has been very strong for both projects despite the premium pricing. This implies that the imminent successful launch of The Mansions and KL Eco City would establish new market clearing prices, leading to a re-pricing of future presales as well as secondary units in the suburbs. This was the case when the Casaman was launched in Desa ParkCity at the then unprecedented price of RM600psf in 2010.

• There may also be potential liberalisation of residential plot ratios particularly in established urban areas where there is an acute shortage of land available for development, coupled with strong effective demand, we believe. As it is, we are already seeing generous plot ratios at select sites to defray the high land cost. Such a move, if it materialises, would accentuate NAV expansion from higher gross development value. We have yet to factor this into our NAV models.

• Tactically, we also expect newsflow centering on the redevelopment of some 3,300 acres of prime land in Sungai Buloh to sustain buying interests on property equities. The said land has high immediate development potential. The accretion to NAVs should be significant for developers. Kwasa Land – the property arm of Employees Provident Fund – is the master developer, which will establish joint ventures with select developers for several parcels.

• On township track record, S P Setia would be the leading candidate with its ‘Eco Park’ brand. It also boasts a comprehensive management team. Sam Ling’s Desa ParkCity and Gamuda Land are other good partners, given their strong niche in developing premium residential projects that serve as industry benchmarks. IJM Land and Sime Darby Property may also play a role, while MRCB may be eyeing the commercial precinct. We believe that the tender for the JV parcels may take place after the award of the MRT construction packages this year.

MAINTAIN OVERWEIGHT ON PROPERTY SECTOR

We reaffirm our OVERWEIGHT stance on the property sector, with SP Setia and IJM Land as our deep conviction BUYs. In this report, we are raising our NAV estimates to reflect an expected reacceleration of residential pricing growth of 10% this year versus 5% previously due to rebound in transaction volume and higher replacement costs. We expect NAV upgrades to lead the next wave of re-rating for property equities.

We have raised our fair value on IJM Land from RM3.88/share to RM4.00/share – based on an unchanged 10% discount to our FD NAV of RM4.45/share. This is following our last week’s report (13 of April) on SP Setia, where we have lifted our fair value for SP Setia from RM7.38/share to RM8.10/share – at parity to our revised fully-diluted (FD) NAV of RM8.10/share.

On a relative basis, we continue to expect newsflow momentum centering on presales and acquisitions to be more significant for SP Setia than IJM Land.

STRONG INPUT COSTS DRIVING HIGH PRICES

Replacement costs are on the rise due to escalating land cost as well as rising prices of the building materials from timber, aluminium, and cement to steel. The recent aggressive bids for land surrounding mature neighbourhoods would solidify the strong price trends as land traditionally accounts for between 25%-30% of residential prices. And cement makers including LaFarge had just lifted its average selling price by some 6% in March 2011. The steel companies including Ann Joo and Lion Group are also guiding for higher selling prices this year.

SALES REMAIN SOLID

The expected re-acceleration in residential prices would also be preceded by a sustained expansion in transaction volume, which is already underway now. Our discussions with developers revealed that demand has rebounded strongly in the past month, as evident from the strong response to recent launches. Buyers appear to have adjusted to the 70% loan-to-value restriction on third property, paving the way for meaningful inventory liquidation cycle to kick in.

• Landed properties selling well

We gather that Setia Alam’s latest offerings have been very well received. There are only about four units left for Gardenia – launched in February – a typical double-storey development, with prices starting at around RM600k/unit.

Meanwhile, Duta Villa, which was launched about a week ago, has seen a take-up rate of 60%. It comprises 3 & 3.5-storey superlink units with pricing starts at RM1.6mil or on average at RM360psf.

The same can be said of Sime Darby’s Denai Alam where the recent launch saw a 91% take-up for its 2-storey superlink units. These were sold at close to RM700k with built-ups averaging at 2,500sf.

Also, from our channel checks, the group has managed to sell almost 90% of the 2.5-storey superlink units in Bdr Bkt Raja, Klang for RM690k/unit-RM780k/unit.

• Selected condo units too

YTL Land’s latest product The Capers in Sentul East was very well received with a 98% take-up within two weeks after its launch. The development comprises 338 high-rise units and 128 low-rise suites.

The high-rise units were fully taken up within two days of launch at an average pricing of RM600psf-RM650psf with built-ups ranging between 695sf-1567sf. Recall that YTL Land’s two previous residential developments in Sentul East were sold for an average RM300psf.

The low-rise units were also well received, which may also indicate buyers buying into the Mass Rapid Transit (MRT) factor. We gather an MRT station would be stationed just few blocks away from the development.

Similarly, Sunway City has already sold two blocks (out of four blocks) of high-rise units in South Quay. Priced at an average RM600psf, the units have built-ups ranging from 1,300sf- 1,600sf.

PROLIFIC LAUNCHES ON THE WAY

There are several prolific presales in the coming months at select prime neighbourhoods that may establish new pricing benchmarks, with an associated uplift to set the broader residential pricing trends. Desa Park City is set to launch 127 units of ‘terrace’ houses – The Mansions, priced from an unprecedented RM650psf (+8%) on built-up area. At KL Eco City, SP Setia will be launching some 750 condominium units priced from RM900spf.

Registration of interests has been very strong for both projects despite the premium pricing. This implies that the imminent launch of the The Mansions and KL Eco City would establish new market clearing prices, leading to a re-pricing of future presales as well as secondary units in the suburbs. This was the case when Casaman was launched in Desa Park City at then unprecedented price of RM600psf in 2010.

Sam Ling would be launching ‘The Mansions’ – comprising 2.5, 3 & 3-storey superlink houses – with prices ranging from RM2.5mil-RM4mil or at a whopping RM650psf on average! Built-ups start from 4,300sf, 6,100sf and 6,500sf for the 2.5, 3 & 3.5-storey units, respectively. This is a gated and guarded hilltop development, next to the most recent launch, Casaman.

Other launches in the pipeline include Mah Sing’s Icon City in Petaling Jaya, and Sunway City’s Velocity in Cheras. Icon City, an integrated residential/commercial development along LDP highway (GDV of RM900mil), is touted as the key catalyst for the Mah Sing going forward.