Unclear stance in property sector affect banks
Amajor sector affecting the performance of banks is property, plagued by oncertainties as the new govenrment under the Pakatan Harapan ruling hopes to address and rebalance housing issues and policies as fairly as it can.
Kenanga Investment Bank Bhd (Kenanga REsearch) in its third quarter strategy report for properties saw that valuationon for property players under its purview were near rock bottom.
“Our universe’s average RNAV discount is now at 63.4 per cent or close to its historical peak level of 68.5 per cent.
“In terms of forqward PBV, we note that the following developers are trading at historical lows and are well below their own book values such as UEMS, IOIPG, SP Setia Bhd, Huayang Bhd, and Sunsuria Bhd.
“For big land- bank owners namely UEMS, IOIPG, and SPSETIA; note that their landbank costs are based on historical acquisition costs with bulk of acquisitions made several years ago, implying low land costs compared to prevailing market value – it also means that the company’s valuations imply no further development profit.”
This may be a primer for potential mergers and acquisitions ( M& As) or even privatisation plays, Kenanga Research said, but at this juncture, it has yet to hear any whispers on the matter.
“We view the Financial sector ( KLFIN) as key driver of the property sector as most house purchases are financed by home loans.
“The construction sector (KLCON) is equally important to the property sector as it is a cost factor which ultimately influences developer’s margins.”
The firm went on to highlight that higher business risk profiles should be commensurated by higher return on equities (ROEs).
“Based on the type of risks undertaken by each of the players, it is fair to assume that banks carry the heaviest risks being the end-financier which has longer loan tenures – some also finance projects in which they are also providing end-financing services to buyers.
“This is followed by developers which carry the development risks but has a shorter ‘holding’ tenure and faster capital recovery than end financiers, and contractors carrying the least risks amongst the three players as it is more service-oriented in nature.
“So, it stands to reason that the KLFIN’s ROE should be higher than the KLPRP, while the KLPRP’s ROE should be higher than KLCON’s – this was the case prior to CY16 but since then, the KLPRP’s ROE is currently below the KLFIN and KLCON, weighing down on property stocks’ valuations.”
But will property valuations re- rate? Kenanga Research believes the sector needs further policy clarity, particularly on the affordable housing policy (including a national database), which requires time for the new ruling government to study.
Minister of Housing and Local Government ( KPKT) Zubaida Kamaruddinpreviouslyconfirmed with a previous interview with BizHive Weekly that it will enter into discussions with the Ministry of Finance (MoF) and Bank Negara Malaysia ( BNM) soon to talk about relaxing current lending guidelines to enable more home buyers from the B40 and M40 groups to secure housing loans.
Part of the evaluation is expected to consider family household income as opposed to just individual income and widening the scope of rent-to-own (RTO) schemes.
“However, even if there is easing, we believe it will at best, only sufficient to help developers maintain current sales momentum for reasons we will elaborate below,” Kenanga Research added.
Thus, there was a need for further clarity in affordable housing policy. Under Pakatan Harapan’s manifesto, one of the promises is to build one million affordable homes across Malaysia within two terms of the new ruling government – this implies an average of 100,000 new units per annum over a 10-year period.
“While this promise bodes well for the national aim to increase homeownership, it begs the question; will listed developers see competing future supply?,” it asked.
“Will there be room for the pie grows for house buying? The other aspect of property demand is lending liquidity to the sector.
“Even residential loans applications and approvals indicators have shown strong improvements, we note that this has not been felt by our universe of developers; in our earlier reports, we highlighted this could be due to competition from government housing schemes and other non-listed developers which are catering for this affordable market.”
With very flattish residential transactions, developers have had to fight for market share to achieve their sales targets.
Over CY17, Kenanga Research did not observe any significant improvements in its universe’s market share on a year-on-year basis.
“We think the current banking system’s real-estate appetite has moderated from its peak three to five years ago,” it believed. “Currently, the proportion of housing to total banking system loans is at a record high of 31 per cent.”