Property sector
Maintain neutral. Property transactions in Johor have plummeted 33% quarter-on-quarter (q-o-q) in the fourth quarter of 2014 (4Q14), underperforming the country (-7%) and other major cities/states such as Kuala Lumpur (-12%), Selangor (+2%) and Penang (+8%).

At the same time, Johor property prices have weakened 1% q-o-q versus Malaysia’s -0.2%, KL’s -0.9%, Selangor’s -0.1% and Penang’s -0.3%.

Developers from China have been aggressively accumulating land bank in Iskandar Malaysia (IM). Shanghai-based developer Greenland Holdings Group recently acquired 128 acres (51.79ha) of freehold land in the south of Bandar Baru Permas Jaya while Country Garden has received the green light from the Department of Environment to continue its massive reclamation of 3,425 acres of the Forest City project near the second link.

Malaysian developers have scaled back their launches and shifted their product mix to avoid direct competition with the Chinese developers. The former’s sales expectations for their IM projects have also been lowered. Judging from the number of approved high-rise projects, the Iskandar property market could be hit by too much supply of high-rise mixed projects if there is still no coordinated planning and control. This will induce price volatility.

The oversupply situation will be exacerbated by the huge incoming supply in 2015/2016 where units under construction have risen 18% year-on-year in 2012 and 2013, respectively.

We remain cautious about property exposure in IM and prefer developers with exposure in the Klang Valley and Penang. Among the stocks under our coverage, UEM Sunrise Bhd (UEMS) and Sunway Bhd have the largest exposure to IM at 88% and 57% of their total gross development value (GDV), respectively.

We remain cautious about the increasingly crowded development space in IM and think the oversupply situation is likely to get worse before it gets better. The oversupply of apartments/retail spaces in hotspots such as the Nusajaya-Medini and Danga Bay areas may cause a decline in property values over the medium term.

Judging from the number of approved high-rise units (80,900 units, source: KGV International Property Consultants), the IM property market could be hit by too much supply of high-rise mixed developments inducing price volatility.

This will be aggravated by ample incoming supply by end 2015/2016 (units which were launched during IM’s peak in 2012/2013), affecting UEMS’, Sunway’s and Tropicana Corp Bhd’s medium-term outlook as most of their land banks is located in the hotspot areas.

Geographically, we prefer the Klang Valley (KV) over IM given the upcoming KVMRT/LRT lines and potential KL-Singapore high-speed rail which will end at Bandar Malaysia.

More importantly, the strong population growth potential in Greater KL/KV (+>40% to 10 million by 2020) offers more sustainable demand for properties.

We remain “neutral” on the property sector. Presently, property stocks under our coverage are trading at an average of 29% to 57% discount to our revised net asset value estimates, which we believe reflect their near-term outlook.

We advocate investors to go defensive in view of the potential downcycle which could last from nine months to two years.

S P Setia is our only pick for the property sector. We like it for its: 1) earnings defensiveness backed by RM10.2 billion of unbilled sales as at end-January 2015 and strategically located land bank secured at cheap land costs; and 2) dividend payout policy of 50% (or 4.5% net yield, we estimate). S P Setia has been paying more than 60% of its net profit over the last few years. The leadership/management vacuum concerns are over in our view.

Staff turnover has stabilised with a well-planned transition strategy. A potential merger and acquisition is another catalyst. — Maybank IB Research, April 14

This article first appeared in The Edge Financial Daily, on April 15, 2015.