Domestic property sales to remain flat this year, says RHB Research

NST Wed, Jun 29, 2022 09:47am - 1 year View Original


KUALA LUMPUR: Property sales growth for this year is expected to be flat as the current economic headwinds are taking a toll on the sector.

RHB Research expects property sales to be around the same level as last year.

"For 2022, although the property market should benefit from the re-opening of the economy, the uncertainties brought about by the inflationary pressure, the swing in the ringgit, and the potential recession risk in the western countries could hit demand recovery.

"Therefore, some developers like Sime Darby Property Bhd, which has a backing of RM1.5 billion in bookings, may not be able to convert all into contractual sales," the bank-backed research firm said in a note today.

On rising raw materials, RHB Research said that although the spike in building materials and labour costs was much higher, the overall impact on developers would be relatively gradual as developers had locked some contracts in earlier.

New projects will likely see a thinner margin due to the inability to pass on the incremental construction costs to house buyers fully.

Developers have already seen declining margins over the past 4–5 years due to discounts and rebates offered to unwind unsold inventory. The research firm noted that this (margin) trend is expected to continue.

Furthermore, RHB Research also noted that cost pressure will likely persist until year-end.

"While it is hard to predict the price direction of many commodities, based on the overall inflationary impact on the broader economy, we think the cost pressure will last at least until the end of 2022."

"In addition, we do not think the labour shortage issue can be resolved over the near term, as various sectors are also competing for the supply of labour, once it is available," the research firm said.

"While we think the rising interest rate should affect demand for property, the impact will likely be gradual as the current mortgage rate is still relatively moderate compared to the rate five years ago," RHB research said.

On the other hand, the higher interest rate may affect developers with high gearing, as the additional borrowing costs may further dampen development margin and, hence, earnings, the firm noted.

Within the sector, RHB Research said township developers and asset owners should fare better given the current market environment.

Developers with ongoing township developments such as Matrix Concepts Holdings Bhd (MCH) and Tambun Indah Land Bhd (TILB) should see more resilient sales, smoother construction progress, and a lesser impact on margin.

On the other hand, the income stream for asset owners such as IOI Properties Group(IOIPG) and UOA Development Bhd (UOAD) should strengthen more significantly this year as the economy and international borders re-open, RHB Research noted.

RHB Research maintains Neutral for the domestic property sector.

"We prefer township developer MCH and asset owner IOIPG as their earnings are expected to be more resilient.

"As the heightening inflationary pressure will likely last longer, the rising building material costs, labour shortage issues, as well as higher interest rates, would hit developers with many new projects and high borrowings more materially," the research firm said.

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