Overall property sales to remain subdued next year

Property development sector

Downgrade to neutral: Property sales recovered in the third quarter of 2016 (3Q2016) as six of the seven developers under our coverage registered 18% to 160% quarter-on-quarter sales growth.

However, property transaction activities lost momentum in early 4Q2016 after a disappointing Budget 2017 was released for the sector, and as many anticipated, relaxation measures did not materialise.

In our view, the volatile ringgit movement against major currencies after the US election on Nov 8 compounded the property slowdown by dampening the sentiment of homebuyers.

Our economist thinks that Malaysia’s gross domestic product (GDP) will still grow by 4.2% in  its forecast (2017F), same as our projected growth rate for 2016F. However, we believe wage growth could be slower next year, due mainly to weaker business and consumer sentiment, which could cause employers to be more cautious in their capital and wage spending.

We believe that the sector’s fundamentals neither improved nor deteriorated much in 2016. Property prices are still rising despite the oversupply of high-end properties and developers with mass-market products are still able to achieve their sales targets. However, we view issues such as low affordability, mismatch of supply and demand, high incoming supply of completed properties and rising competition from public housing projects, as continued risk factors for private developers’ sales.

We expect overall property sales to remain subdued next year compared to this year due to the unexciting macroeconomic outlook and sector fundamentals. We think mass-market residential projects could be one of the few exceptions, as there is still strong pent-up demand for this type of property as there was undersupply in the past few years. In our view, developers that have lined up major launches of mass-market housing projects for next year offer the highest chance of exceeding their 2016F sales in 2017.

Among the developers that we cover, we believe Eco World Development Group Bhd (“Add”, target price [TP]: RM1.75) and LBS Bina Group Bhd (“Add”, TP: RM2.15) have the highest chance of sustaining 2016 sales in 2017, as their launch line-ups consist of many mass-market housing projects, which we believe will still enjoy strong demand next year.

Our rating for the property sector assumes that the economy will continue to grow at a decent rate (that is to say the real GDP growth of around 4.2%) in 2017F. A sharp deterioration in economic conditions and rise in the unemployment rate are the key downside risks to our call.  — CIMB Research, Dec 14

This article first appeared in The Edge Financial Daily, on Dec 16, 2016. Subscribe to The Edge Financial Daily here.