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Dampened by two setbacks
The property sector suffered two setbacks recently. First, the government re-introduced real property gain tax (RPGT) with effect from 1 January 2010 at a flat rate of 5% of capital gains. While the actual financial impact on property buyers is negligible, the untimely reintroduction of the RPGT hurts sentiment as it raises uncertainty on whether government will impose more policy measures going forward, which will dampen the property sector.
The second setback is the increasing mortgage rates. Over the past month, mortgage rates offered by several banks have been increased. Based on our on-the-ground checks, we noticed that spread on mortgage loans have been narrowed by about 40 basis points (bps), while certain banks have also discontinued loans with zero entry cost.
While this may be perceived as a dampener to the property sector, we believe its impact to be minimal as mortgage rates have remained significantly below long-term averages. What is more important in driving demand for property, in our opinion, is consumer confidence, which is still improving.
But sales momentum of residential properties remains strong
Despite these setbacks, we view positively the way in which property buyers have brushed aside these dampeners and continue to snap up properties due to low mortgage rates and improving economic outlook. This can be seen by encouraging sales achieved in recent property launches. For example, the latest launch of 174 units of terrace houses in Alam Impian by Island & Peninsula on 21 November, which was highlighted in the media, have been fully taken up during that weekend itself.
We believe the current low mortgage rate and more importantly, improving consumer sentiment will sustain residential properties demand going forward. Based on historical data, we noted the strong correlation between consumer sentiment index (CSI) and the growth of residential properties transaction. Since hitting a low of 70.5 in the second quarter of 2008 (2Q08), the CSI has rebounded above the 100-point neutral level since 2Q09.
Developers are also looking more confident in rolling out new launches. Since hitting a bottom in 4Q08, new launches has picked up, with rising take-up rates. As of 2Q09, take-up rates of newly launched properties within the same quarter rose to 31.7%, which was the highest since 4Q05. We have also seen more landbanking activities by developers in the past few months, indicating more property launches in 2010 to capitalise on buoyant sentiments among property buyers.
Activities in commercial properties also picked up
Activities in the commercial properties sub-segment have also picked up of late. While overhang in the office space market remains a concern which will cap capital values, occupancy and rent in the near term, local investors taking a longer term view are in the market looking for quality assets in the past few months. Some notable transactions include the acquisition of 50% equity interest in Menara Citibank by Hap Seng, the acquisition of Tower D, Glomac Damansara by Lembaga Tabung Haji as well as the acquisition of a retail/office tower in Southgate by Permodalan Koperasi Felda.
Further relaxation of EPF housing withdrawal will be a boost
A catalyst that may boost the property sector is the impending announcement by Employees Provident Fund (EPF) in January 2010 on the details of a scheme that will enable EPF contributors to utilise current and future savings in Account 2. This is likely to boost housing affordability especially among first time home buyers.
Upgrade to overweight
The convergence of sustained property demand and recent price correction affecting property stocks have led us to believe that the property sector will be an outperformer going into 2010. Hence, we are upgrading our call on the property sector to overweight as valuations are more compelling now.
We believe developers with residential properties catering to middle to upper middle class such as Sunway City to benefit from strong demand and hence, re-affirm it as our top pick for the sector. Besides, its property investment earnings will also ensure sustained earnings visibility. Other developers that would also benefit from such sustained demand for residential properties in diverse locations include SP Setia, Mah Sing and IJM Land.
For commercial properties, we are negative on office space providers as large incoming supply will cap capital values, occupancy as well as rent in the near term. The only exception is KLCC Property due to the its super-prime location and master lease arrangement which will ensure its earnings sustainability.
For commercial properties developers, we like Glomac for its prime commercial landbank and most importantly, its track record in securing en bloc sales with local institutional investors.
