Strong demand remains for properties

Although the value of residential loans approved, an indicator of property sales, fell 15% in 2016, four out of the seven developers in our coverage managed to grow their property sales by 3% to 77% in 2016. Their sales outperformance, driven by the focus on township and mass-market developments, suggests there is still strong demand for properties in certain segments even though overall property market activities are weak.

Three out of the seven developers in our coverage (Eco World Development Group Bhd, LBS Bina Group Bhd and S P Setia Bhd) target 5% to 21% sales growth in 2017 while Mah Sing Group Bhd aims to at least maintain its FY2016 sales level. UEM Sunrise Bhd is the only developer that targets lower sales of RM1.2 billion in 2017, compared with the actual sales of RM1.4 billion in 2016. However, UEM Sunrise’s 2016 sales included en bloc sale of a commercial property worth RM368 million. When excluded, UEM Sunrise’ sales target for 2017 is 20% higher than the actual sales in 2016.

The developers appear to be optimistic about the property market conditions in 2017 relative to those in 2016, judging from their sales targets for this year. However, we think property sales could remain weak in the next few months. The unexciting wage growth prospects and inflationary pressures could continue to weigh on homebuyer sentiment in the near term, in our view.

Despite the challenging near-term outlook, we believe new property sales recovery might gain strength in late-2017. We think the incoming supply of residential property will peak by mid-2017 as many developers have held back their launches since 2015. Also, the bulk of the property projects that were launched before 2015 would be completed by the end of this year. The peaking of incoming supply could mark the beginning of easing competition among developers and existing homeowners for property sales.

Still, we think property share prices appear toppish in the near term as property sales could remain weak in the next few months. We believe that the property market conditions need to improve significantly compared with those in 2016 to lift the Kuala Lumpur Property Index to a significantly higher level. If our expectation of peaking incoming supply by mid-2017 is right, more attractive buying opportunities could emerge in the second half of the year as property stock prices may react positively to the prospects of a trough in the property market.

The key upside risk to our “neutral” sector call is stronger-than-expected property sales while the key downside risk is a sudden deterioration of property market sentiment. - The Edge Property

No comments