The sliding oil prices, which in turn weakened the Ringgit and spooked equity investors is now feared to reverberate to the property sector, which saw investors shying away from property stocks and underweighting the sector. True, the sector has its challenges i.e. tighter financing, high property prices (and high household debt) and oversupply in certain segments-such as highend condominiums in Iskandar- but we believethat the property prices will not correct drastically in the near termdespite the lower volume. Our overweight stance is predicated on property prices holding well, which is supported by ample liquidity, high input costs(due to compliance/land costs), low interest environment and strong secular positives (young demographics and improved connectivity from MRT/LRT/HSR spending).

Demand slower, but still higher than 10-year average. Granted, property sales have softened especially in 1H2014, with the impact of cooling measures and oversupply concerns in certain markets (mainly Iskandar Johor). However, we believe property sales should regain its momentum with demand driven by excess liquidity and investments to hedge against the easy money policy by central banks. In longer term, demand is expected to be sustainable by the young demographics and rising income in the country. Also, property developers such as EcoWorld, Mah Sing, Gamuda and WCT, among others have been actively acquiring land (with some spending in excess of RM1bn in landbanking), which we believe is a sign the sector is expected to be robust. Save for exogenous distortions, we expect property sales at current levels of RM100bn sales p.a (residential and commercial) which is 64% higher than 10-year average of RM66bn to be sustainable in the near term.

Affordability concerns. True, by looking at the median income in Malaysia (the highest in KL: RM5,847 per household), the property prices are already considered unaffordable with the median house prices already more than 5.5x (KL: c.7x for residential properties) as compared to 3x,which is considered affordable range. That said, real assets around the world have also mostly moved up in tandem with easy monetary stance of central banks. We have been bullish on Property for the past 3 years, and property demand has been on the uptick, with the property sales (residential and commercial) increased from RM74.5bn in 2010 to RM107.6bn in 2013, despite the concerns on cooling measures and affordability. We also noted that the transactions for properties valued morethan RM1m have in fact still on the up-trend as at 1Q2014, despite the recent cooling measures.

Source: PublicInvest Research - 9 Jan 2015