Property developers set to face greater challenges in 2023, says Kenanga

• “The sector will continue to be weighed down by oversupply and the declining price affordability, as rising interest rates and inflation bite into consumers’ spending power, let alone high-ticket purchases.”

KUALA LUMPUR (March 15): Real estate developers are expected to face greater challenges this year with limited room to shift higher construction costs to customers whose purchasing power has been eroded by inflation and rising interest rates.

“The sector will continue to be weighed down by oversupply and the declining price affordability, as rising interest rates and inflation bite into consumers’ spending power, let alone high-ticket purchases,” said Kenanga Research in a report on Wednesday (March 15).

The research firm said although all developers have reported healthy sales last year, they will feel the full brunt of contracts signed at high prices with contractors during the pandemic, no thanks to sky-rocketing construction materials and labour shortages during that period.

“With limited room to raise prices amid the declining price affordability and unabated construction cost inflation, players may have to cut back or hold back on new launches,” it said.

Hence, Kenanga kept its “neutral” recommendation on the sector, preferring developers that are able to generate consistent sales and hence sustaining their cashflows to anchor good dividends amid a soft market.

“Under this highly challenging operating environment, we pick developers with strong cashflows that could anchor good dividends, namely Eco World Development Group Bhd for its strong branding, and IOI Properties Group Bhd for the hidden value in its prime investment properties in the Klang Valley, Singapore and China that could potentially be unlocked via a REIT,” it said.

Kenanga has “outperform” ratings for both stocks, with target prices of 83 sen for Eco World and RM1.60 for IOI Properties.

Shares of Eco World gained one sen or 1.5% to 67.5 sen as at 9:52am on Wednesday, giving it a market capitalisation of RM1.99 billion.

IOI Properties, meanwhile, inched up one sen or 0.9% to trade at RM1.11, valuing it at RM6.11 billion.