Property sector - where only the strong will succeed

Established property players with solid financial standing will be able to weather the expected slump in demand for residential properties in the short term and emerge stronger as house buyers start to acquire homes in the longer term, said Kenanga Investment Bank Bhd.

The research house said while the sector would definitely be impacted indirectly by increased raw material cost, developers which had locked in costs and sales by early 2008, like Mah Sing Group Bhd, would be least affected.

“For newer launches, developers could face margin compressions if they are unable to pass on the cost to buyers,” it said.

Kenanga Research said overall property sales volume was expected to decline as potential buyers put off purchases due to inflationary effects resulting from the severe reduction in fuel subsidies.

However, it said property prices should stabilise and be buoyed by inflation factors, but would experience slower growth in the medium term.

The research house said it favoured high-end and commercial property developers with strong branding and good track record, including Mah Sing, SP Setia Bhd, Eastern & Oriental Bhd, Hunza Properties Bhd and KLCC Property Holdings Bhd.

It said the companies could preserve margins by increasing selling price or secure relatively stronger or steadier take-up rates like SP Setia’s townships pursuant to the 1997/1998 Asian financial crisis.

Kenanga Research said the companies’ target market tend to be high net worth individuals who are more resilient to inflationary factors, and their strong balance sheet and cash flow provide them with the ability to withhold launches.

Meanwhile, Inter-Pacific Research Sdn Bhd said demand for homes will come down in the short-term but gradually pick up in the medium- to long-term as buyers adjust to rising living costs and invest in properties that would appreciate over a longer period.

It said the property companies under its coverage were generally performing at average levels, with the exception of YNH Properties which stood out from the rest.

The other companies in its vision are Sunway City Bhd, Hunza Properties Bhd and Mah Sing Group, and the research house said they were still performing at average levels.

The research house said YNH had a slight advantage as it concentrated on smaller projects that could be completed in a shorter time and it did not have the burden of looking after townships.

“Since the company works on shorter time schedule, it can rationalise labour and at the same time minimise project and hence cost overruns. Margins are also better,” it said.

Inter-Pacific Research said it had a neutral recommendation on the property sector, adding that property players could experience thinner margins towards year-end.

It has a buy recommendation on YNH with a target price of RM3.18 for FY08 and for Sunway City, a target price of RM5.67 for FY09. - By The Edge Daily

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