Property development sector
Maintain “neutral”: All-in, Budget 2015 was within our market expectations. We deem this budget as a non-event Budget for the property sector which is in-line with our “neutral” call on the sector given that there is no further cooling measures like further real property gains tax hike.
Budget 2015’s emphasis was more on increasing home affordability for first homebuyers which was largely anticipated.
We had anticipated that the government may:
i) bring back developer interest bearing schemes or DIBS for houses below RM400,000 a unit for first-time homebuyers. If implemented, Hua Yang Bhd, Matrix Concept Holdings Bhd, Crescendo Corp Bhd and KSL Holdings Bhd are beneficiaries, although they may have to downsize their products further which may be challenging in the residential space due to the fixed density ratios/demand for liveable space.This was not proposed but instead, the government proposed a Youth Housing Scheme to aid up to 20,000 first homebuyers across Malaysia.
ii) the government also did not introduce the “zero-rated” category under the goods and services tax (GST) for affordable housing priced below RM400,000/unit. If they had done so, we can imagine it would be an administrative nightmare for developers.
iii) there was no proposal to forego stamp duty on property after the implementation of GST, as proposed by the Real Estate And Housing Developers’ Association Malaysia or Rehda. This was within expectations as other countries with GST do not practise this.
A week before the Budget 2015 announcement, the market underwent a heavy selldown due to weak global sentiment; consequently, property stocks either remained flattish (for example UOA Development Bhd) or sharply corrected by up to 17% (average: 5.9%) over the last week. We had also issued our Property Sector Report, “4QFY14 strategy and Budget-2015 on Oct 3, 2014”, reiterating our “neutral” call as we expected Budget 2015 to be largely “neutral”.
As for the post Budget-2015 announcement, we expect the following:
i) Stock market: Heavily sold-down stocks will likely rebound, particularly from the more defensive type developers who offer yields and operate largely in the affordable segment. We continue to like Matrix Concept, Hua Yang and Crescendo as affordable housing players with yield angles. We continue to advocate year-end plays for major laggards such as IOI Properties Group Bhd and Mah Sing Group Bhd. Our top pick remains KSL, being an affordable player with goodies in the pipeline including a potential dividend policy and the recently announced proposed Income Distribution Reinvestment Plan and one-for-one bonus issue, while it is trading at very compelling valuations of five times to four times financial year 2014 to 2015 estimates core price-to-earnings ratio.
ii) Physical market: Developers will likely be beginning aggressive launches, although they would have to be careful as actual sales and purchase agreement (SPA) take-up rates may take long to materialise. As highlighted in our previous report, a “Pre-GST demand rally” in fourth quarter of 2014 (4QFY14) and 1QFY15 may not be as strong as we had hoped because it really depends on whether banking liquidity to the sector has loosened up. Thus far, the direction does not appear to have changed. So we do expect bookings to be more aggressive while it will take much longer to convert to SPA sales. We will be assessing the situation closely.
We reiterate “neutral” call on the sector. The market expected it to be largely “neutral” and since Budget 2015 was very much within expectations, we believe rebounds to beyond pre-selldown levels in the last week may not be very convincing or sustainable, particularly when the FBM Kuala Lumpur Property Index’s year-to-date gains are still very compelling at 9.6% versus the FBM KLCI’s negative returns of 3.1%. Also, we still need more confirmation from the physical market and banks regarding a convincing “pre-GST demand rally”. — Kenanga Research, Oct 13
This article first appeared in The Edge Financial Daily, on October 14, 2014.