Neutral on property sector due to uneven dynamics
KUCHING: Analysts retain their ‘neutral’ view on Malaysia’s property sector due to the uneven recovery path among developers.
In a report, the research team at Hong Leong Investment Bank Bhd (HLIB Research) said, “As we navigate through 2022, much of the property sector dynamics have changed compared to the previous year, including: pick up in sales and construction activities (from easing of lockdown restrictions), ending of Home Ownership Campaign (HOC) in December 2021, rising living cost and lower household income, inflationary pressures on commodities and building materials cost, border reopening in April 2022, ‘deglobalisation’ trend, anticipated rate hike, and the return of capital inflow from foreign investors.
“Against this backdrop, we anticipate an uneven recovery among the property developers, while pockets of opportunities have emerged as some players will stand to benefit more from these factors.”
It noted that prior to the introduction of HOC, the affordable housing segment enjoyed stamp duty exemption for property value up to RM500,000.
“With the introduction of HOC, the affordable segment loses its comparative advantage as the stamp duty exemption was extended to property value up to RM1 million,” it said.
“With the ending of HOC in December 2021, the tables have once again turned in favour of the affordable segment as purchases in this segment will continue to enjoy stamp duty exemption.
“Even during the HOC campaign, the affordable housing segment was still the most demanded segment comprising more than 75 per cent of the number of residential transactions.
“Furthermore, according to Department of Statistics Malaysia, in 2020, as much as 20 per cent or circa 580,000 households from the M40 households have shifted to the income limit of the B40 group.
“The broadening base of the lower income group coupled with the rising living cost from inflationary pressure especially on the food cost will bolster for the demand in the affordable home segment as home buyers will likely opt for affordable housing due to income constraints,” HLIB Research said.
Building materials costs have also been rising persistently since 2021.
“Under such a rising cost environment, property developers that will fare relatively better are those that outsourced their construction work to third-party as their construction cost will be locked in at a lower cost (amid rising cost environment) when the job was outsourced, and for new launches, developers will also likely be able to outsource the jobs at competitive price as new jobs tender among contractors will likely be very competitive due to fewer job tenders available as developers are more cautious in their launches due to the subdued property sentiment.
“In order to secure jobs to ensure positive cash flow, contractors may be willing to sacrifice some margin to win job tenders from developers. Besides this, developers that enjoy high take-up rate in their launches are also those that are likely to have better pricing power enabling them more flexibility to adjust selling price to sustain their margin,” it said.
As such, property developers that outsourced their construction job with a healthy cover ratio are likely to fare better, it opined.
Aside from that, the research team noted that the RussianUkraine war underscored the fragility of the global supply chain where dependence on other countries for manufacturing and raw material could lead to an abrupt collapse, shortage and price hike in the affected raw material and products in the home country.
“As such, companies that look to mitigate such risks may find the Southeast Asian region, a manufacturing hub to be a safe haven to reshore their manufacturing base as it is largely shielded from the geopolitical risk and trade disputes from the developed countries as well as its attractiveness as a low cost hub due to the weaker local currencies,” it said.
The foreign fund inflows have also so far provided support to the local stock market while benefitting selected sectors such as the plantation sector where its respective index had gained 26.9 per cent YTD.
“As property sector is currently near its historical low in foreign shareholding, the persistent net foreign buying may eventually flow to the sector. As such, other than looking at the themes that we highlighted above, foreign investors will also likely favour names that have a strong ESG rating and profile,” HLIB Research noted.
All in, the research team said: “We maintain our ‘neutral’ rating on the sector as the combination of factors such as economic recovery, ending of HOC, rising building material cost, rising cost of living from inflationary pressure, lower income spending power, anticipated rate hike, borders reopening, ‘deglobalisation’ trend and the return of capital inflow from foreign investors will result in an uneven recovery within the sector.
“Against such a backdrop, investors would find a sweet spot in the affordable housing segment as the segment will benefit from the ending of HOC, rising cost of living and lower income spending power.”