This article first appeared in Capital, The Edge Malaysia Weekly on January 22, 2024 - January 28, 2024

AT a time when many people think the higher cost of borrowing will impact demand in the real estate sector, the property counters on Bursa Malaysia are disproving that view. Meanwhile, construction stocks have benefited from the spillover effect.

The real estate sector, which has not been on investors’ radar screens for years, started gaining traction at the beginning of 2023. The current rally in property stocks does not appear to show any signs of slowing down, at least in the first three weeks of 2024.

UEM Sunrise Bhd continues to be the biggest winner among the property developers, with its share price gaining 292% over the past year to close at 93 sen last Wednesday. It is followed by Iskandar Waterfront City Bhd (IWC), which saw its share price surge 200% during the same period to settle at 78 sen.

The Johor investment theme emerged last year, driven by positive newsflow on the Johor Bahru-Singapore Rapid Transit System (RTS Link) that is slated for completion at end-2026.

Once the 4km RTS Link is completed, passengers will be able to travel from the Bukit Chagar station in Johor Bahru to the Woodlands North station in Singapore, and vice versa, in about five minutes. The train service can accommodate up to 10,000 passengers per hour in each direction.

Located at the southern tip of Peninsular Malaysia, Johor has the second biggest population in the country. However, it has experienced a high residential property overhang, especially in the high-rise segment, for many years now.

UEM Sunrise and IWC have the most exposure to the Johor real estate market. Other notable property firms with exposure to the market have also attracted investor interest, including IOI Properties Group Bhd and Sime Darby Property Bhd, whose stocks have risen 79.7% and 44.2% respectively since early 2023.

With the renewed optimism, other property developers on Bursa Malaysia have seen their share prices recover after being under pressure for years. This is reflected in the decent performance of the Bursa Malaysia Property Index, which has risen more than 33% over the past year and 1.8% year to date (YTD), outperforming the FBM KLCI’s 1.1% decline and 1.7% gain respectively.

Despite the good run of property counters, some analysts remain cautious about the sector, with concerns about oversupply.

Kenanga Research, which has a neutral stance on the property sector, points to the oversupply, high household debt, elevated interest rates and weakened consumer sentiment, which could be further dampened by the government’s subsidy rationalisation exercise. While the total approval rate of property loans improved to 43.9% in October last year from 43.5% in December 2022, according to Bank Negara Malaysia’s data, the research house notes that it was still below 50%, last seen during the industry’s up cycle between 2011 and 2014.

“We opine that the mid-40% approval rate may persist into the near term as banks may continue to exercise prudence in their credit assessment policies. Having said that, it is possible that a higher uptick could be spurred by the rising number of affordable homes in the market, as the barriers to entry may be lower,” Kenanga Research says in a Jan 12 report.

“On the other hand, the household debt-to-GDP reading of 81.9% in the first half of 2023 remains lower than the pre-pandemic level of about 88%. This may reflect continued hesitation in consumers to borrow, particularly for larger commitments.”

The research house’s top picks in the property sector are Mah Sing Group Bhd and MKH Bhd, with a target price of RM1 and RM2.11 respectively, given their focus on affordable housing priced at RM500,000 and below. Mah Sing’s share price had gained 52.2% since January last year to close at 86 sen last Wednesday, while MKH’s stock price had jumped 13.5% to RM1.41.

On the Johor property market, Kenanga Research says while the RTS will ease cross-border movements between Singapore and Malaysia, it expects locals or Malaysians working in Singapore to be the main buyers of properties in Johor.

“We opine that prospective Singaporean buyers may be more inclined on real estate in more developed cities such as Kuala Lumpur, which are more attainable thanks to their forex advantage,” says the research house.

“While there has been significant interest from equity investors (and not property investors) in the property market in Johor due to the proposed Special Economic Zone (SEZ) in Forest City and improved connectivity with RTS, they will only be operational in 2025 and 2026 respectively under a blue-sky scenario. Nonetheless, we see a bright spot in the affordable housing segment.”

Following the bull run in the shares of UEM Sunrise, analysts have turned cautious on the stock, with six recommending “sell” and two “hold”. There was only one “buy” call.

As one of the research outfits to have a “sell” call, Maybank IB Research says UEM Sunrise’s current valuation has “more than priced in the positive developments in Iskandar Malaysia”. At last Wednesday’s closing price of 93 sen, the stock was trading at a forward price-earnings ratio of 63 times.

The research house has lowered its earnings forecasts for UEM Sunrise by 10% to 16% for 2023 to 2025 after the property developer’s 3Q2023 core net profit of RM9 million came in below expectations. Its target price for the stock is 68 sen.

RHB Research is more positive on UEM Sunrise, with a “buy” call and a target price of RM1.18, premised on the announcement of the SEZ.

“Although its specific location was not mentioned as expected, the MoU highlighted how both governments will cooperate and jointly develop the SEZ, and efforts include expediting approvals and the clearance of people and cargo at land checkpoints. UEM Sunrise (an Iskandar play), Sunway, IOI Properties and AME Elite Consortium should benefit from the strong growth in Johor,” it says in a Jan 12 report.

The bullishness seems to have spilled over into the construction sector, as evident from the one-year gain of 31.5% and YTD gain of 7.48% on the Bursa Malaysia Construction Index. Its top five constituents are Gamuda Bhd, IJM Corp Bhd, Sunway Construction Group Bhd, WCE Holdings Bhd and Kerjaya Prospek Group Bhd.

Among the best performers in the construction sector are WCE Holdings, Econpile Holdings Bhd and Bina Puri Holdings Bhd, which have seen their share prices surge 180%, 106% and 87.5% respectively over the past year. It is worth noting that the share price of Bina Puri has fallen almost 12% this year, after multiple small- and mid-cap stocks tanked last week.

Nonetheless, some analysts see more upside to the construction sector should the Kuala Lumpur-Singapore high-speed rail (HSR) project be revived. The project could potentially cost RM100 billion.

The government has made it known that the project will only be revived if private companies are willing to fund it. Although Japanese firms have decided against participating in the project as they are ostensibly of the view that the project is too risky without financial assistance from Putrajaya, Minister of Transport Anthony Loke has assured that the mega project remains unaffected, pointing out that seven local and international consortia, comprising a total of 31 firms, have submitted concept proposals for the HSR project.

The project is to be structured under a design-finance-build-operate transfer model, with the asset to be handed over after the concession period. After multiple hurdles over the decades, MyHSR Corp has called for concept proposals on the HSR project from the private sector.

“For a project of this scale, we expect the federal and state governments to be involved in a lengthy and complex land acquisition process. The surrounding land may be monetised to partly defray the cost of building the railway, stations and facilities,” AmInvest Research says in a Jan 15 report.

“However, we do not discount further hurdles and reviews to this decades-long proposition, which could have additional route realignments before the government reaches the final investment decision against the backdrop of escalating construction costs. Hence for now, we have not factored in this project for any of the companies’ order book replenishment assumptions under our coverage, pending greater clarity from the authorities.”

Nonetheless, the research house reckons that the new Yang di-Pertuan Agong, together with the renewed excitement in infrastructure and property developments in Johor, could be a positive catalyst for investor sentiment. This will benefit developers with exposure to the market such as YTL Corp Bhd, Gamuda, IJM Corp, Sunway Construction Group, WCT Holdings Bhd, Malaysian Resources Corp Bhd, MMC Corp Bhd and Berjaya Corp Bhd.

AmInvest remains “overweight” on the construction sector, on the recovery of job flows in the first half of 2024 underpinned by a stable government and improving operating margins that are further catalysed by prolific overseas jobs.

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 project, the Sabah-Sarawak Link Road (RM7.4 billion) and reinstatement of the Light Rail Transit 3 (LRT3) stations (RM4.7 billion). 

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