This article first appeared in Capital, The Edge Malaysia Weekly on December 25, 2023 - December 31, 2023

THE property sector was hot in 2023. This wasn’t widely expected at the start of the year. Some attributed this to the pent-up demand following the Covid-19 pandemic, with property developers rushing to launch projects to ride the trend.

On top of that, news of the government’s intention to set up a special economic zone in Johor plus the progress of the Johor Bahru-Singapore Rapid Transit System (RTS) have spurred buying interest in property stocks, especially those with a presence in the state.

“The property sector stood out this year as one of the sectors that performed well, as seen from the improvement in YTD aggregate numbers in earnings (+5.1% year on year), sales (+21.4% y-o-y) and launches (+1.17 times y-o-y),” Hong Leong Investment Bank Research (HLIB Research) says in a Dec 7 property sector report.

The research house says the improvement in earnings was mainly because of the acceleration in billings recognition, as labour shortage conditions improved this year, and higher sales. The improvement in sales was mainly due to more launches year to date, it adds.

The total value of mortgage applications has been on a climb since February. In October, the loan applications for property purchase increased 23% y-o-y to RM54 billion, according to the Bank Negara Malaysia data, a bigger increase than the 15.7% in September.

The value of approved mortgages was also higher in October, up 15.9% y-o-y to RM23.9 billion. On a monthly basis, the total approved loans in October was 9.3% higher and the approval rating was 44.3%, compared with 40% in September, the central bank’s data shows.

Indeed, demand for residential and serviced apartments have been the key driver. The property overhang situation in these segments eased in 3Q2023.

According to data provided by the National Property Information Centre (Napic), the number of transactions in the residential segment in 3Q2023 increased to 68,561 from 64,913 in the previous corresponding period.

For the first nine months of 2023 (9M2023), there were 188,534 transactions in the residential segment compared with 181,091 in 9M2022 and 243,190 in 2022. The figures showed a recovery to pre-pandemic levels. There were 209,295 transactions in the residential segment in 2019.

Interestingly, the number of transactions for commercial properties in 3Q2023 jumped 33.3% y-o-y to 11,409 from 8,561 last year. Serviced apartments are included under commercial properties.

There were 29,011 transactions in the commercial sector in 9M2023 compared with 23,729 in the previous corresponding period. On a yearly basis, there were 32,809 transactions in 2022 and 25,654 transactions in 2019.

UEM Sunrise Bhd is the biggest winner among property developers this year. Its share price rocketed 222% YTD to 81 sen on Dec 20. It is followed by Iskandar Waterfront City Bhd (IWC), which saw its share price surge nearly 142.6% to 65 sen. Meanwhile, Eco World Development Group Bhd saw its share price climb 72% YTD to RM1.03.

Both UEM Sunrise and IWC have massive land banks in Johor.

In fact, Johor saw 11,832 transactions in the residential segment in 3Q2023, a huge jump of 56.7% y-o-y compared with 2Q2023. In the commercial property segment, 2,538 transactions were recorded in 3Q2023, more than double from the 1,122 transactions in the previous corresponding quarter.

For 9M2023, the number of property transactions climbed to 45,420 from 34,468 a year earlier.

The improvement in the Johor property market, as well as the state’s economic and development prospects, has led to at least one research firm raising the fair value of UEM Sunrise’s stock.

In a Nov 16 research note, AmInvestment Bank pegged a fair value of 77 sen on UEM Sunrise, 28% higher than 60 sen previously, due to a lower discount rate of 40%, which was at a similar level when the shares were traded in FY2016 to FY2019.

The lower discount rate assigned to UEM Sunrise is to reflect the improving sentiments in the Johor property market, particularly in Iskandar Puteri, as well as a declining trend of unsold units and an upward revaluation of land banks in the city, says the investment bank.

“The announcement of the details of the JSSEZ (Johor-Singapore Special Economic Zone) will see the acceleration of industrial property development in Iskandar Malaysia. We expect more launches and higher property prices in Iskandar Puteri in the subsequent years,” AmInvestment Bank says in the research note on UEM Sunrise.

Johor has been earmarked for a major revitalisation. The memorandum of understanding for JSSEZ is expected to be signed in January 2024.

The revival of the Kuala Lumpur-Singapore high-speed rail (HSR) project has been talked about in recent months. Nevertheless, the government has made known that the project will only be revived if there are private companies willing to fund it. The news spurred buying interest in property counters.

While the Johor story has boosted investor interest in property developers with exposure to the state, the overall sentiment in the property development sector has been positive so far this year.

Of the 97 constituents of the Bursa Malaysia Property Index, 53 saw double-digit gains in their share price as at Dec 20. This compares with just 20 in 2022 and 31 in 2021.

“We see the stronger loan applications as positive to the sector as it indicates stronger buying interest in property. Looking ahead, we believe demand for property will be stronger in CY2024 due to the improving property landscape in Malaysia,” says MIDF Research in a Dec 6 note.

The recovery of the property sector in 2023 seems to have helped keep the construction sector afloat at a time when public jobs have been rather muted, given the government’s efforts to rein in spending.

According to the Construction Statistics for 3Q2023 by the Department of Statistics Malaysia (DOSM), the value of work done in the construction sector continued to sustain a positive pace for the sixth consecutive quarter, with a y-o-y growth of 9.6% to RM33.4 billion. This is the highest level of the value of construction work done in a quarter since 1Q2020, when RM35.04 billion worth of work was done.

In the residential building subsector, RM20.16 billion worth of construction work was done in the first nine months of 2023. This is a slight increase from the previous corresponding period, when RM19.54 billion worth of work was done.

In terms of contract flows, HLIB Research notes in a construction sector outlook report on Dec 20 that the sector fared better this year than in 2022 as the economy recovered from the pandemic-induced malaise, resulting in a 16% jump in domestic contract awards to listed companies. “Most of which was private sector-driven as we estimate private jobs bounced back by 44% with stronger rollout of jobs from commercial/residential developments, data centres and industrial type developments.

“On the flipside, public contracts were weaker by -15% y-o-y due to delays attributable to (i) the retabling of Budget 2023, and (ii) mid-year state elections. Some 62% of public contracts by value came from the Johor Bahru-Singapore RTS and Penang South Islands — Island A projects.”

While the construction sector in 2023 did not have the best of years due to the slow rollout of public contracts, the Bursa Malaysia Construction Index (KLCON) managed to gain upward momentum. KLCON had gained 23.8% YTD as at Dec 20 to 188.89 points.

Gamuda Bhd is the biggest winner in terms of contract flows. Its outstanding order book stood at RM25.8 billion. Its share price went up 26.3% YTD to RM4.60 per share and contributed the largest percentage to KLCON’s upward movement this year, at 37.28%.

Another key contributor to KLCON’s gains is highway concessionaire WCE Holdings Bhd, which expects toll revenue to start kicking in. The concession holder of the West Coast Expressway saw its share price surge 195% during the year to 90 sen. The counter contributed 25.48% to KLCON’s upward movement this year.

IJM Corp Bhd is another major mover of KLCON, with its share price rising 23.57% YTD to RM1.88 on Dec 20. Sunway Construction Group Bhd’s share price increase of 32.31% YTD to RM2 contributed 9.22% to the index’s movement.

HLIB Research opines that the recent appointment of the second minister of finance should start to debottleneck the project pipeline, while the ongoing subsidy rationalisation exercise will have an incremental effect on lifting fiscal space as potential savings are repurposed for infrastructure projects over the longer term.

“We see 2024 as an opportune time to start building — factoring in implementation time lags, the full scale of economic multiplier effect to be felt before the next GE (general election),” says the research house.

Among the big-ticket projects that are expected to be rolled out in 2024 are the RM15.7 billion Pan Borneo Sabah Phase 1B, flood mitigation packages worth RM11.8 billion, the RM10 billion Penang LRT, the Sabah-Sarawak Link Road (RM7.4 billion) and reinstatement of LRT3 stations (RM4.7 billion).

“We also expect further developments on civil packages for the MRT3 (tender validity extended to March 2024) while there is potential for more newsflow from other prospective projects like the KL-Singapore HSR and Johor LRT (RM20 billion). Tangible developments for the Special Economic Zone and Special Financial Zone [Forest City] in Johor could generate more construction opportunities, in particular with the former given greenfield status,” HLIB Research says in the recent report. 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.