Is the worst over for property stocks?

  • Business
  • Saturday, 15 Oct 2016

Wish list: There are high expectations for Budget 2017 mainly on the construction of affordable houses costing up to RM500,000.

All eyes on Budget 2017 to help first-time buyers own houses

PROPERTY counters will be closely watched with the announcement of Budget 2017 on Oct 21. The property sector is a major driver of the economy, where it is tied to construction, land and property transactions as well as other related industries.

While some think that the budget will continue to be people-centric and remain muted for the property sector, there are high expectations mainly on the construction of affordable houses costing up to RM500,000.

Property developers have renewed their wish list, mostly fixated on relaxing guidelines for first-time home buyers.

Also in the list are the reintroduction of a revamped developers’ interest-bearing scheme (DIBS) and the financing flexibility of 95% loan for first time home buyers, 90% for second homes, followed by 70% for third homes.

Requests have also been made for a higher debt service ratio from 70% to 80% for first time home buyers and loan tenure to be extended from 35 years to 40 years, increasing funds in Employees Provident Fund Account 2 from the current 30% to 40% of total balances to allow for higher mortgage down payments and lowering or removing the real property gains tax.

The property market has been soft since 2014, where prices were on the uptrend.

But since 2015, property players have been crying foul over the introduction of anti-speculative measures, the most painful was striking off the DIBS in January 2014 to manage the escalating real estate property prices.

To recap, the DIBS is a scheme where a developer helps the buyer to absorb the mortgage interest during construction of the property. The selling prices of properties with a DIBS package may fetch a premium of between 5% and 15%, according to reports.

Despite all the hype, the sector remained resilient amid a challenging backdrop weighed down by weak sentiment.

In December 2015, the bigger players such as IOI Properties Group Bhd and S P Setia Bhd stood a better position to weather the storm and buffer the domestic weakness with overseas project contributions. They performed well financially.

Mah Sing Group Bhd, on the other hand, did not drift off due to its high unbilled sales, while IGB Corp Bhd remained steady, supported by higher retail and hotel contributions, as well as stable office rentals.

Eastern and Oriental Bhd, however, was impacted by delays in launches.

Outlook in 2016

Analysts have projected property sales for developers to improve by 13% in 2016 after declines of 21% and 24% over 2014 and 2015.

Despite the uncertainties globally and political issues in the domestic front, they expected the market sentiment to improve in 2016 as consumers adapt to the goods and services tax and the weak ringgit.

A noticeable trend among property developers amid the tough market conditions is that most of them are shifting to the mid-market segment to support property sales.

In December, KAF-Seagrott & Campbell Securities forecast sector earnings to grow by only 5% in 2016 as progress billings declined following weaker sales over the past two years.

The growth, KAF said, would be buffered by overseas projects for some developers as well as expectations of stable earnings from retail and office segments for the investment asset owners.

The sector traded at a 12.9 times financial year 2016 (FY16) forecast price-earnings (PE) and 0.8 times price-to-book value (P/BV), relative to the market’s 15.1 times PE and 1.6 times price-to-book value.

On the individual companies’ performance, IOI Properties’ unbilled sales as of May 2016 stood at RM1.5bil, representing about one time FY15 property development revenue.

For the financial quarter ended June 30, 2016, IOI Properties registered increase in both revenue and operating profit mainly from property development, property investment and leisure and hospitality.

As of June 30, the group has total assets worth RM22.81mil, up 24% from last years’ RM18.44mil. Its cash reserves stood at RM2.09mil, with a net gearing of 14%.

It saw a fair value gain on investment properties of RM145.4mil and one-off gain of RM71.1mil from bargain purchase for acquisition of subsidiaries.

Meanwhile, S P Setia’s unbilled sales as of June 30, stood at RM8.2bil, with net gearing ratio of about 24%.

For the financial quarter ended June 30, the group’s revenue was derived from construction of an exhibition centre in Penang, a complex in Setia Alam and a commuter station at KL Eco City.

Meanwhile, Mah Sing Group Bhd has unbilled sales of RM4.8bil as of May, 2016.

Macquarie Research forecasts the group’s net gearing to be between 4% and 5% from 2016 to 2018.

The affordable housing segment accounts for 50% of Mah Sing’s financial year 2016 launches, according to Macquarie.

UEM Sunrise has unbilled sales of RM4.3bil as of June 30, and more than half of its property sales in the first half of 2016 are from overseas ventures, according to its notes.

With a net gearing ratio of 23% for FY15, UEM Sunrise was the hardest hit in 2014, among other property stocks according to analysts due to poor take-up rate of launches in Iskandar Malaysia.

Market likely to improve

When Bank Negara implemented the 25-basis-point cut in the overnight policy rate to 3% in July, share prices of property players on Bursa Malaysia surged.

Large-cap property players rallied steeply and saw gains of 5% or more. Major players included I0I Properties, S P Setia, Mah Sing, Eco World Development Bhd and UOA Development Bhd.

According to a few research houses and property investment companies, there is a strong relationship between gross domestic product (GDP) and property transactions.

IQI Group Holdings, a property investment firm based in Kuala Lumpur and headquartered in Dubai, expects the property market here to improve next year, mainly backed by market confidence and infrastructure investments.

Its chief economist/investment strategist Shan Saeed says there is a correlation between the GDP and the property market.

“If the GDP is good, then we can expect the property market to perform well.

“And more property developers are choosing the right location, accessible via public transportation such as MRT, for their projects,” says Shan.

IQI expects Malaysia’s GDP to grow between 4.2% and 4.7% next year on improved market confidence, infrastructure investments and aggregate demand.

Many developers are still trying to meet their projected sales targets and want to help first-time buyers own properties.

With the money-lending licence proposition from the Urban Wellbeing, Housing and Local Government Ministry and possibility of a higher withdrawal from EPF to help new house buyers, all eyes will be on Budget 2017.

Is there a glimmer of hope for first-time home buyers? This will be known in due course.

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