This article first appeared in The Edge Malaysia Weekly on September 25, 2017 - October 1, 2017

AFTER a strong start to the year, some property stocks have faltered in recent months. Despite the lacklustre outlook and absence of near-term catalysts, there could still be trading opportunities in the sector, especially those counters that ride on broader market sentiment.

Analysts The Edge spoke to agree that things remain unexciting for the property market in the near term as it is poised for a slow recovery. That said, the rally earlier in the year, which saw sentiment defy fundamentals, could be repeated on a smaller scale, depending on how the broader market performs.

Between Jan 1 and May 2, the Kuala Lumpur Property Index (KLPRP) rose 17.8% to 1,328.23 points. Since then, it has fallen 7.2% to 1,232.80 points on Aug 11. As at Sept 20, the index was at 1,253.86 points, up 11.2% year to date.

The rally earlier in the year rode a wider feel-good sentiment in the markets as the FBM KLCI grew 6.25% in the first quarter (1Q2017) — its best start to a year in a decade. The benchmark index went on to hit 1,792.35 points on June 14 — up 9.2% from Jan 1 — before faltering to 1,753.38 points on July 13. Last Wednesday, the KLCI ended at 1,773.58 points, up 8.03% year to date.

“The rally in the first half of the year was mainly due to M&A (mergers and acquisitions) news flow, but since then, sentiment has died down,” says Loong Kok Wen, a senior analyst at RHB Research.

She opines that if the KLCI rises further by year-end, the broader sentiment could support a further rally among property stocks — but not all of them, as there is a lack of catalysts otherwise.

“Property is a high-beta play, so we should expect some rotational play as well, even though the sector is a bit lacklustre. People might play on the valuation angle, in that case.

“(It) could be mild and short-lived as only certain stocks with specific catalysts will see significant investor interest,” she says via telephone. She adds that such catalysts could include bonus issues, free warrants, strategic partnerships or further M&A activities.

Loong’s top picks are SP Setia Bhd, which has risen 16% YTD, and IOI Properties Group Bhd, which has gained 8.2% YTD. “Both have exposure to overseas markets that will help mitigate the slower growth domestically.”

In 1Q2017, 86 components of the KLPRP closed in green territory while the remaining 10 saw a decline. But in 2Q2017, more than half of the first-quarter gainers tumbled.

YTD, 69 KLPRP constituents remain in the green against 25 decliners. Two counters remain unchanged, according to Bloomberg data.

As at Sept 20, the top gainers YTD were HCK Capital Group Bhd (+93.6%), Malton Bhd (+83.46%) and PLB Engineering Bhd (+83.06%) while the top decliners included Naim Holdings Bhd (-34.74%), Ewein Bhd (-27.21%) and Hua Yang Bhd (-24.77%).

Ang Kok Heng, chief investment officer of Philip Capital Management Sdn Bhd, believes the KLCI still has legs. He expects the index to breach 1,800 by year-end, a level not seen since May 2015.

“Normally, the market tends to be better by year-end,” he tells The Edge. “The continuous weakness in the US dollar will drive more foreign funds here.”

Up till Sept 15, foreign investors had poured RM10.99 billion net into Bursa Malaysia, offsetting 37% of the net outflows seen over the past three years. The ringgit has strengthened against the greenback this year, rising over 6% as at Sept 20 from the doldrums of 2015 and 2016.

Although the outlook of the property sector over the next year remains flat and challenging, there is more breathing room for developers now, opines a senior analyst with a local research house. “I don’t think we’ll see a sharp rebound from here. The recovery will be L-shaped for a while, so the forward strategy is to be selective.” The analyst says the question is which developers will have the strongest staying power amid a slow market.

These sentiments are echoed by the findings of the half-yearly survey by the Real Estate and Housing Developers Association (Rehda) released last week. While the survey shows increasing optimism among respondents, only 48% of the respondents plan to launch new properties in the second half of 2017.

Tellingly, 76% of them expect their future sales performance to be at 50% or lower. Rehda president Datuk Seri F D Iskandar Mohamed Mansor attributes the mismatch to growing realism among the developers. “A little bit of confidence (among buyers) has crept into the market, but it’s still too early to say whether (things) will improve or not, moving forward,” F D Iskandar tells The Edge. “We have strong broad numbers (in terms of economic growth) but it is not translated into the man on the street, so the level of confidence is still not there.”

In 2Q2017, the economy expanded 5.8%, beating the median estimate of 5.4% from a Bloomberg poll of 26 economists. Bank Negara Malaysia governor Tan Sri Muhammad Ibrahim said on Aug 18 that full-year growth may exceed the official forecast of 4.8%.

Is a rebound in the property market imminent? F D Iskandar says it depends on how fast the confidence level recovers further.

Some indicators look encouraging. Bank Negara data shows that mortgage approvals have been increasing for seven consecutive months up to July, totalling RM74.1 billion or a 10% increase y-o-y, driven by higher applications.

That translates into an 8% y-o-y increase in property transaction values for 1Q2017, according to the National Property Information Centre, a unit of the Ministry of Finance.

But the improvements could be due to a low base effect after two consecutive years of decline in terms of volume and value of residential property transactions up to 2016. According to the Ministry of Finance’s Property Market Report 2016, only 31.4% of new property launches in 2016 were sold, the weakest performance since 2010.

Residential overhang — completed units unsold nine months after being put on the market — rose 43.8% in volume and 70.7% in value last year.

And more supply is incoming. As at December last year, incoming supply of homes was at the highest since 2002, says

AllianceDBS Research analyst Quah He Wei. “There will be a gestation period for all the new deliveries. There would not be a catalyst for the sector until at least the later part of next year.”

Quah’s preferred stocks are Eco World Development Group Bhd (+17.2%), Yong Tai Bhd (+24.6%), Matrix Concepts Holdings Bhd (+24.5%) and MKH Bhd (-20.7%).

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