Property sector re-rated strongly. The property sector performance, as measured by the KL Property index, has outperformed the FBM KLCI YTD by some distance (or more than 20%) on sector recovery post-pandemic. Of late, the sector is also seen as a key beneficiary of the data centre boom in the country. To recap, the KL Property Index dropped to as low as 0.2x book value during the pandemic through is now hovering at 0.7x book value. Sentiment toward the sector was initially stoked by renewed speculation over the KLSingapore High Speed Rail (HSR) project, ongoing developments surrounding the Johor-Singapore Rapid Transit System (RTS) and a special financial zone in Iskandar Malaysia.

Property developers are now seen as potential beneficiaries of the data centre boom as asset owners or via land disposals to data centre investors. For instance, Sime Darby Property is building a hyperscale data centre at its flagship township, City of Elmina for Google which is touted to be worth as much as RM2bn in rental proceeds over 20 years. Meanwhile, Eco World Development is disposing industrial land measuring approximately 123.1 acres located in Kulai, Iskandar Malaysia to Microsoft Payments (Malaysia) Sdn Bhd for a cash consideration of RM402.3m or c.RM75psf. Other peers such as Mah Sing Group has also announced a Memorandum of Understanding (MOU) to develop new data centres within its townships.

Property sales rose 9.91% YoY to RM196.83bn in 2023 — the highest ever recorded by the National Property Information Centre (Napic). As for the number of transactions, it was largely flat at 399,008 in 2023, a 2.54% increase from 389,107 in 2022, with the bulk (62.8% or 250,586) units coming from the residential subsector. Likewise, the residential sub-sector contributed the majority (or 51.3%) of 2023’s transaction value at RM100.9bn, followed by commercial (19.5%), industrial (12.2%), agricultural (9.5%) and development land and others (7.5%). This positive growth trend is driven by a higher increase in transaction value in all subsectors, namely residential (up 7.1% YoY), commercial (up 17.5% YoY), industrial (up 13.1% YoY), agriculture (up 4.6% YoY) and development land and others (up 13.8%).

Meanwhile, the Malaysian House Price Index (MHPI) — a measure of Malaysian home prices — stood at 216.5 points (RM467,144 per unit) in 2023 with a moderate annual growth of 3.2%. In 1Q 2024, the property sector recorded 104,297 transactions valued at RM56.53bn (+34.3% YoY), primarily driven by significant increases in transactions across all subsectors, particularly the commercial subsector (+51.5% YoY) and agricultural subsector (+64.2 YoY). Meanwhile, the unsold completed residential properties (overhang) dropped to 24,208 units valued at RM16.49bn from 25,816 overhang units valued at RM17.68bn in the fourth quarter of 2023 (4Q23). Preliminary data for the Malaysian House Price Index (MHPI) in 2Q24 stood at 216.9 points (RM467,997 per unit) with an annual growth rate of 0.5%.

Easing overhang. On overhang or unsold completed houses, the situation has further improved according to the National Property Information Centre's (Napic) Property Market Report 2023, the number of overhang residential units fell 7% YoY) to 25,816 in 2023, versus 27,746 units in 2022. Value of overhang residential units also declined 4% to RM17.68bn in 2023, from RM18.41bn a year earlier. Last year, the residential overhang was led by units priced at RM300,000 or below at 29.4%, closely followed by RM500,001 to RM1m (29.1%), then RM300,001 to RM500,000 (25.3%), and above RM1m (16.2%).

By state, Perak overtook Johor as the number of overhang residential units in the silver state spiked worryingly by 98.9% to 4,598 units in 2023, versus 2,312 units a year ago, while Johor’s fell 19.6% to 4,228 in 2023, from 5,258 previously. Other states that Napic deemed to have a high number of overhang residential units were Kuala Lumpur with 3,535 units, and Selangor with 3,405 units. The number rose 3.1% in Kuala Lumpur from 3,429 in 2022, while in Selangor, there was a decline of 7.9% from 3,698 units in 2022.

Residential bank loan leading as at April 2024 is still seeing a 15% growth YoY to RM39.4bn as reported by Bank Negara Malaysia (BNM). Overall, we observe that earnings growth in 1Q24 for property companies is positive, driven by higher recognition from property projects as the labour shortage issue was resolved while improving new property sales and land sales have also supported earnings growth. Loans approval is also still steady at about 41%, which is similar to preCOVID levels. With the OPR expected to hover around 3%, we expect mortgage loans growth to remain relatively healthy in absence of exogenous events.

Staying at sidelines for now. All told, we are of the view that risk-reward is not attractive now with the KL Property Index trading at about +1SD or 0.7x book value. Previously, we note that when the KL Property index was trading at such valuations, the sector return on equity (ROE) was about 9% - 10% during the 2013 – 2015 period. Currently, sector ROE is only ranging at about 3% - 4% and as such we believe that much of the positives have been baked-in especially on COVID recovery demand and of late, data centre deals that saw flurry of land transactions. In addition, we are also wary of the weak consumer sentiment on rising cost of living, risk of slowing economy and affordability issues (worsened by interest rate hike). We keep our NEUTRAL stance for now.

Source: PublicInvest Research - 26 Jun 2024