AS the property industry’s patchy recovery has been dampened by the central bank’s monetary policy tightening, supply chain disruptions and labour shortages, analysts are maintaining a “neutral” stance while keeping their eyes peeled for encouraging pockets of growth in the sector.

Analysts note that housing affordability, which was integral to the property sector’s recovery last year, is now eroding amid rising interest rates and soaring construction costs as property developers struggle to pass on the increases to buyers.

Maybank Investment Bank Research analyst Wong Wei Sum says in a Dec 27 report that recent conversations with developers revealed that demand for mid- to low-end properties has slowed as low- to middle-income buyers’ ability to purchase homes may have been impacted by interest rate hikes.

“As price hikes will hurt take-up and put the viability of new launches at risk, most developers will choose to sacrifice [their] margins,” Kenanga Research analyst Lum Joe Shen writes in a Jan 13 report.

For perspective, Bank Negara Malaysia data show that loan applications for the purchase of property declined for four consecutive months towards the end of 2022. Total loan applications fell 2.9% and 6.4% month on month (m-o-m ) in November and December respectively, following the declines of 11.1% and 7.3% in September and October.

Analysts have attributed the decline in loan applications to the high overnight policy rate (OPR), which was raised four times between May and November last year by a total of 100 basis points to 2.75% by Bank Negara’s monetary policy committee in an effort to rein in soaring inflation levels.

They also took into account data released by the National Property Information Centre (Napic), which show that the overhang in residential properties eased significantly from 34,092 units in 2Q2022 to 29,534 units in 3Q2022. The sharp drop was led by Selangor (-14.9% q-o-q), Johor (-11% q-o-q) and Penang (-5% q-o-q). Johor has the highest number of overhang units at 5,348, followed by Penang (5,222) and Selangor (4,386).

The decline in overhang units could be attributed to the reopening of the economy as it allowed foreign buyers, such as those from Singapore, to return to Malaysia’s property market.

“We see the lower number of overhang units as a slight positive for the property sector, with overhang units falling below 30,000 units, which is the lowest level since 2Q2021,” remarks MIDF Research analyst Jessica Low Jze Tieng, who favours property developers with high exposure to affordably priced properties in the mid-market and affordable segments as these categories “continue to see resilient demand from homebuyers”.

Kenanga’s Lum, however, is not impressed by the data on overhang units. He foresees a long path to recovery as he believes the number of units in circulation — including overhang units and unsold units that are still under construction — is “still rather high compared with historical levels, thus creating price competition and pressure for new launches”.

Maybank IB’s Wong and MIDF’s Low maintain their “neutral” calls on the property sector.

Bright spots in terraced housing, industrial properties

Lum, who has a “neutral” call on the property sector, notes that terraced homes have stood out as the only subsegment to show notable growth since the onset of the pandemic, while prices of high-rise residences or detached homes either declined or grew marginally.

He believes developers that focus on townships, such as Eco World Development Group Bhd, IOI Properties Group Bhd (IOIPG) and Sime Darby Property Bhd, have an advantage over other developers. He has an “overperform” call on the three companies, with a target price (TP) of 83 sen, RM1.60 and 55 sen respectively.

Lum cautions that property developers’ high borrowing levels could ultimately hurt their earnings, adding that the developers under the research house’s coverage have shown increased net debt levels during the pandemic, with the exception of EcoWorld and UOA Development Bhd, on which it has a “market perform” call and a TP of RM1.75.

His top picks are developers that have strong cash flows capable of “anchoring good dividends, such as EcoWorld and IOIPG”. “We like EcoWorld for its strong branding and prudent cash flow management, and IOIPG for its hidden value within its prime investment properties in the Klang Valley, Singapore and China, which could potentially be unlocked via a real estate investment trust,” he says.

RHB Research analyst Loong Kok Wen, who has a “buy” call on IOIPG (TP: RM1.40), believes that the group’s earnings will be “solid given its stronger stream of recurring income” with the completion of its IOI City Mall Phase 2 in Putrajaya last August and Central Boulevard Towers in Singapore, which is slated for completion in the third quarter of this year.

“With its Green Mark Platinum Certification for green sustainable building design, Central Boulevard Towers will command premium rental rates. It should achieve a 50% to 60% occupancy rate within the first two years,” she tells The Edge.

There is also potential in industrial properties, which Maybank IB’s Wong believes gained traction after Malaysia reopened its borders in April last year. “We expect the strong sales momentum to extend into 2023 with rising investment diversion from China on the persisting US-China trade war,” she writes in a recent report.

Wong upgraded Tambun Indah Land Bhd and UEM Sunrise Bhd to “buy” and “hold” respectively during the September-October 2022 quarterly earnings reporting season, from “hold” and “sell” earlier. Like Kenanga’s Lum, she also has a “buy” call on EcoWorld and Sime Darby Property, and has a “hold” call on S P Setia Bhd and Sunway Bhd.

Wong has upgraded her “sell” call on Eco World International Bhd to “buy” in view of a potential distribution windfall via a capital repayment. “We like the potential distribution windfall of 37.5 sen per share (which accounts for 90% of its current share price) by end-2023. To recap, ECWI expects to generate more than RM1 billion from the sale of inventories in FY2023,” she says.

Meanwhile, Wong points out that EcoWorld is looking to acquire new land bank for its industrial properties after its industrial property sales jumped 1.5 times year on year to RM753 million in FY2022 while Sime Darby Property acquired 949 acres of agricultural land from Sime Darby Plantation Bhd for RM618 million, or RM15 per sq ft, in December last year. The land will be developed into an industrial park, she adds.

Meanwhile, MIDF’s Low likes Mah Sing Group Bhd (TP: 74 sen) and Glomac Bhd (TP: 48 sen) for their strategy of selling properties in the affordable price range.

Low foresees a better earnings outlook for Mah Sing amid a pick-up in progress billings of its ongoing projects. She also foresees a positive sales outlook for the group amid the upcoming launches of its M Series developments comprising both landed and high-rise residential properties in Kuala Lumpur. “Demand for M Series affordable housing remains supported by genuine homebuyers,” she says.

As for Glomac, Low is positive on the group’s township projects, which offer affordably priced properties that are “well received by homebuyers”. “Its valuation is undemanding, trading at a steep discount of 78% to its latest net tangible assets of RM1.51 per share,” she says.

Meanwhile, RHB’s Loong, who also has a “buy” call on IOIPG (TP: RM1.40) and Sunway (TP: RM2.06), upgraded her “neutral” call on the property sector to “overweight” in early January. She believes the negative impact of labour shortages, interest rate hikes and rising inflationary pressures faced by the sector has been fully priced in.

“The concerns surrounding some of these issues should be over very soon as developers/contractors will start receiving new batches of foreign workers in a few months [and] interest rate hikes [by the central bank] may end soon,” says Loong.

“We must be forward looking. Our in-house economists expect a shallow recession, if any. However, economic data [out there] show that things are not as bad as previously thought,” she emphasises.

Loong points out that in the macro environment, things such as high footfall at shopping malls have been encouraging, which have bolstered the research house’s outlook.

“In addition, the ringgit and the political environment in Malaysia have been stabilising. There may be some minor turbulence such as the Umno elections but overall, factors have been positive for the property sector,” she says, adding that stock valuations — which are “still hovering at the -2SD (standard deviation) mark — are still very cheap”.

“We are also encouraged by the fact that the property sales momentum has not weakened much, despite the unfavourable macroeconomic factors in 2022. Hence, downside risks to developers’ earnings should be mitigated going forward. Indeed, a high number of real estate companies under our coverage reported earnings that beat expectations during the recent 3Q2022 results.”