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Wednesday September 14, 2011

Property downgrade

UOB Kay Hian pushes down sector to market weight

PETALING JAYA: UOB Kay Hian has downgraded the local property sector due to slower residential home sales, especially in the second half of the year, coupled with an anticipated tightening of property measures.

The research house, which downgraded the sector from “overweight” to “market weight”, said in its latest note that sales launches by property developer might had slightly dampened with average take-up rates of 50% to 65% compared with 80% to 90% a year ago.

It said there could be cooling measures on the sector, namely the re-introduction of a real property gains tax (RPGT), loan-to-value cap at 70% for second mortgage and mortgage approval criteria based on net salary.

Although these measures might not have been put in place, it added that the impact had already been felt as most of the property stocks had fallen about 10% to 25% since last month and were now trading sideways.

UOB Kay Hian noted that most companies were trading at a 10% to 20% discount to their respective revised net asset value (RNAV). Selectively, the research house said it liked property developers that could still benefit from the rollout of the Economic Transformation Programme (ETP) and positive news flow from Iskandar Malaysia.

It is maintaining its “buy” calls on MRCB (target price: RM3.02) and UEM Land (target price: RM2.68). The near-term catalysts for MRCB is the contract awards for phase 1 of River of Life and clinching parcels of RRI Land in Sg Buloh by year-end.

UEM Land, as the flagship developer of Khazanah, will continue to benefit from the land price appreciation through the materialisation of Iskandar Malaysia, which is currently very much on track, according to UOB Kay Hian.

It recently downgraded Mah Sing to “hold” with a target price of RM2.51 (10% discount to RNAV) and also maintained a “hold” on SP Setia with a target price of RM4 (10% discount to RNAV).

The research outfit is currently reviewing the target price and notes that there could be further downside if the market continues to fall, given its relative premium valuation compared with its peers.

Nevertheless, UOB Kay Hian said it expected mainstream property developers' valuations to hover at between mean and one standard deviation (SD) above mean.

This healthy valuation range reflects the positives of a low mortgage rate environment (of 4%-5%), the ability to secure coveted federal landbank, potential merger and acquisition activities within the sector (for example, IJM Land and MRCB), and in the intermediate term, the positive spill-over to land prices from mega projects like the MRT lines and River of Life.

Most of the property companies in UOB Kay Hian's coverage had also experienced positive changes in their business models, which justified higher above-historical valuations, it added.

Meanwhile, a property analyst at MIDF Research said it would maintain a “neutral” call on the sector this year unless there were policy changes that would impact demand for properties, like the reintroduction of the RPGT, loan-to-value cap of 70% for second homes and approval of mortgage loans based on net salaries.

He said the current low interest rate environment with the overnight policy rate maintained at 3% was still attractive and would spur demand for properties barring any unforeseen circumstances.

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