This article first appeared in The Edge Malaysia Weekly on December 6, 2021 - December 12, 2021

DESPITE a higher median house price in the third quarter of this year, the recovery path for Malaysia’s property sector is not expected to be smooth, say analysts. This is due to risk factors such as the Covid-19 virus, timing of the 15th General Election, as well as movement in prices of key building materials.

As such, investors should remain cautious when it comes to investing in property development stocks, especially those that have rallied over the past 12 months, the analysts say, as the uptick in prices might not necessarily indicate a recovery in the property market.

“I don’t think we can conclude that the higher median house price points to a firm and sustainable recovery in demand,” Loong Kok Wen, RHB Research’s property analyst, tells The Edge.

“It (the recovery in the property sector) will still depend on a number of factors (such as) GDP and income growth, unemployment rate, interest rate. Most importantly, whether the threat of Covid-19 and the new virus variants can be contained.”

Sporadic spikes in the number of daily infection cases or an outbreak of the mutating virus would lead to market fear and could negatively affect property market sentiment and macroeconomic growth, she adds.

Data from the National Property Information Centre (Napic) for the third quarter of 2021 (3Q2021) shows that the median house price in Malaysia increased to RM320,000 from RM300,000 in the first half of this year (1H2021).

The median house price was RM295,000 in 2020 and RM289,646 in 2019. The last time it exceeded RM300,000 was in 2017.

The sustained rise in median house prices from 2020 until 3Q2021 could have prompted investors to flock to property stocks and fuelled their price rallies over the last 12 months.

In that period, the share price of S P Setia Bhd, for example, rallied more than 56% to RM1.22 as at last Thursday, while that of Eco World Development Group Bhd more than doubled to 84 sen.

This was despite the fact that GDP growth was still weak in the first nine months of the year as a result of the Movement Control Orders as well as the disruption in supply chains brought about by the economic and social lockdowns worldwide.

For Loong, the rally in share prices could be attributed to the stocks’ depressed valuations over the last two to three years. The rally, especially in October, was driven mainly by the expectation of goodies to be announced in Budget 2022, she says.

“However, the budget turned out to be a disappointment. Apart from lowering the real property gains tax beyond Year 5, there were no major incentives offered to the mass market home buyers and developers.”

Nevertheless, there has been an improvement in the overhang in residential property. According to Napic, in 1H2021, there were 31,112 overhang units worth RM20.1 billion in the market.

The number fell to 30,290 units worth RM19.75 billion in 3Q2021. This could be an indication that the Home Ownership Campaign (HOC) has been effective in correcting the imbalances in the residential property market.

Historical data shows, however, that there has been a decline in the number of overhang units in the second half of each year. There were 32,810 overhang units in 1H2019, which declined to 30,664 units in 2H2019 before rising to 31,661 units in 1H2020.

In 2H2020, the number fell to 29,565 units, before increasing again to 31,112 units in 1H2021. This rise could be a result of the timing of launches by developers.

The number of unsold units under construction also held steady in 3Q2021 at 74,370 units, from 74,844 units in 1H2021. This shows the property market is still flooded with offerings while the absorption rate has not been high.

Property agents whom The Edge spoke to allude to an active secondary market compared with the number of new launches. They say, however, that some projects priced at the right level and in the right location have sold quite well.

Loong observes that developers have been trying very hard to unwind their inventory units by offering attractive discounts and rebates, and quite a number have been able to consistently unload their stock.

“Based on sales data reported by developers so far, buyers typically prefer new launches, probably because of the better locations and more affordable products offered,” she says, in contrast to the property agents’ observations.

Overall, RHB Research is still relatively cautious on the property market and is hopeful that the government will extend the HOC, as it is important in supporting a recovery in demand.

“We believe demand will be slightly better in 2022, assuming there will be no more rolling lockdowns, and economic activities continue to pick up. Having said that, developers’ margins may be affected because of the high building material costs.

“We do not think the developers will be able to pass on the additional costs to home buyers, given the current property market conditions,” says Loong.

While the residential property market is still weak, Nawawi Tie Research in its Kuala Lumpur real estate report for 3Q2021 states that many developers are capitalising on demand for more affordable properties by focusing on development outside the city centre.

“Underpinned by the positive progress in the National Recovery Plan and strong vaccination rate nationwide, a brighter residential market is expected from the third quarter onwards as people gradually gain confidence about a market recovery,” the real estate research firm states.

Loong of RHB Research calls for a “buy” on Tambun Indah Land Bhd, with a target price of 87 sen, Matrix Concepts Holdings Bhd (TP: RM2.47), IOI Properties Group Bhd (TP: RM1.53) and Sunway Bhd (TP: RM2.06).

Meanwhile, CGS-CIMB Research property analyst Ngo Siew Teng has an “add” call on S P Setia, with a target price of RM1.81, down from RM1.82 previously, and a “hold” call on UOA Development Bhd, with a target price of RM1.65, versus RM1.67 previously.

PublicInvest Research analyst Tan Siang Hing has a “neutral” call on UEM Sunrise Bhd, with a target price of 55 sen, and an “outperform” call on Eco World, with a 98 sen target price as at Sept 20. Tan also has an “outperform” call on Sime Darby Property Bhd, with a target price of 76 sen.

AmInvestment Bank analyst Lee Ching Poh has a “buy” call on Mah Sing Group Bhd, with a target price of 95 sen, and a “hold” call on Sime Darby Property, with a target price of 67 sen.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.