AS the property sector continues to grapple with lower sales amid a growing glut, stocks of listed developers have been underperforming the market and almost all are now trading at discounts of more than 50% to their book value.

A quick look at 10 of the big-cap property counters (having a market capitalisation of more than RM1 biliion) on Bursa Malaysia also reveals that more than half have lost more than a fifth of their share prices over the past one year.

A number of analysts have turned positive on specific property stocks, but are they jumping the gun, given that most research firms have a neutral view on the property market as a whole?

TA Investment Management chief investment officer Choo Swee Kee is of the view that the significant correction in the share prices of property counters is due to the poor outlook for property sales and the oversupply situation. However, he does not see the situation continuing indefinitely.

“This is a normal business cycle the sector has to go through. Looking back, we have had more than five years of good property market and rising property prices, but it could not go on forever as affordability of properties became an issue,” he says.

“Hence, we are now facing a correction and I won’t be surprised if this correction lasts for four to five years. The market will turn around ultimately.

“Many property counters are trading at 30% to 40% below their asset value. What this means is that it is actually cheaper to invest in these counters than the actual land bank or properties. We think property counters are attractive in term of valuation, but [will] need time to recover.”

The worst is not over for property players, especially those with overhang units to deal with, opines Areca Capital Sdn Bhd CEO Danny Wong, who holds a very small percentage of property stocks in his portfolio.

Data from the National Property Information Centre shows that last year, the country’s residential property overhang rose 30.6% to 32,313 units, comprising mainly condominiums and apartments priced above RM500,000.

“Players that do not have a strong balance sheet may face cash flow problems as property sales are currently weak due to market conditions,” Wong tells The Edge.

Hong Leong Investment Bank research analyst Andrew Lim Ken-Wern cautions investors looking to invest in the sector to be selective in their stock picks. “We are more positive about companies that have a niche product offering. For example, those with expertise in planned townships such as Matrix Concepts Holdings Bhd, and those that have exposure to non-property development segments such as Sunway Bhd, which is a successful conglomerate with growth potential stemming from its healthcare segment, among others.”

On the overall market outlook, he says sales targets have mostly been flat or even lower on a year-on-year basis — an indication that sentiment is not turning upbeat anytime soon.

“As we noted, houses priced below RM300,000 made up the biggest share of transacted properties last year, but products in this range do not provide attractive margins for developers. We expect demand for houses priced RM300,000 and above to remain challenging moving into the second half of the year,” he adds.

On the other hand, Lim observes the rising number of landbanking exercises suggests developers are beginning to prepare for new launches in the upcoming years. “Compared with 2018, there were more landbanking exercises carried out by developers under our coverage in the first half of 2019. Sunway continued to increase its exposure in Singapore via its joint venture with Ho Hup Realty Pte Ltd while others expanded locally. In the southern region, Matrix replenished its land bank in Bandar Sri Impian while MB World Group Bhd expanded its exposure in  Johor Baru. In the central region, Mah Sing Group Bhd acquired a parcel in Mukim Petaling while S P Setia Bhd entered into more land swap deals in Cheras.

“Based on our channel checks, we note that this could be partly due to attractive prices offered by vendors compared with previous years amid the sluggish market condition. We expect developers with healthy balance sheets to further replenish their land bank and take advantage of attractive prices.”

AmInvestment Bank analyst Thong Pak Leng says in a note to investors that in the last 12 to 18 months, the property sector has seen some changes whereby the residential market has been adjusting to mass-market affordable housing while developers were slowing down their launches and working hard to clear unsold units.

“On the bright side, developers are getting more aggressive in clearing unsold units by offering discounts. The inventory level is now declining. We believe that this is a positive move to realise cash flow, albeit at a cost to their profit margins,” he says.

AmInvestment Bank’s top picks in the property sector are Sunway, given that its local and overseas property launches have been generally well received, and IOI Properties Group Bhd, which is banking on strong contributions from its property development projects in China and Singapore.