Another unexciting year as outlook remains challenging

Property sector

Maintain neutral: Recapping 2016, which is similar to 2015, property companies continued to underperform on the FBM KLCI Index with average return of -5% as compared with FBM KLCI at -3% for the year 2016.

For first half of financial year 2017 (1HFY2017), we expect the sector’s fundamentals to remain largely unchanged with its outlook remaining challenging. Year to date (YTD) 2016 (until November 2016), monthly loan applications and approvals for properties mostly gyrated in negative growth territory, reinforcing our view that property buyers remain in the wait-and-see mode.

Incoming supply had reduced slightly from the peak of 892 thousand units in fourth quarter of FY2015 (4QFY2015) to 837 thousand in 3QFY2016, accounting for 17% of existing stock, but remaining high historically.

In order to boost sales in the challenging market, developers have come out with different kinds of creative products. These incentives come with a cost, evidenced by average earnings before interest and tax (Ebit) margin for developers falling from 27% to 23%.

With house prices capped by affordability, affordable landed properties will continue to see sustained demand.

We expect the high-speed rail (HSR) to be the long-term catalyst for surrounding property development. Matrix Concepts Holdings Bhd (1,200 acres [485ha]), UEM Sunrise Bhd (4,800 acres) and Sunway Construction Group Bhd (1,770 acres) are the main beneficiaries. We expect an oversupply situation in Johor to improve in the long term as demand catches up, catalysed by the HSR.

We maintain a “neutral” stance on the sector for 2017 mainly due to the absence of near-term catalyst. We expect the outlook to remain challenging with house prices continuing to be capped by low affordability. — Hong Leong Investment Bank, Jan 12

This article first appeared in The Edge Financial Daily, on Jan 13, 2017. Subscribe to The Edge Financial Daily here.



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