The oversupply issue in Iskandar will likely persist over the next 2-3 years until substantial economic activities are in place. In addition to the current country-specific risk, the weak MYR is unlikely to draw foreign buyers over the near term. Maintain NEUTRAL on the sector. In tandem with the macro concerns, sector valuations could head to preGE13 levels, ie -1SD from the mean sector discount to RNAV.

Still in the doldrums. We recently made a day trip to Iskandar with a group of fund managers from Singapore. The same negative factors affecting Iskandar and the broad property market remain: i) oversupply, ii) weakening economic growth, iii) political instability, and iv) a depreciating currency. We visited only the Nusajaya area, and observedthat construction activities are everywhere but business activities are lacking. According to Savills and the Department of Valuations and Property Services (JPPH), assuming all projects move ahead, there will be 248,447 new residential units coming on-stream, marking a 58% increase over the existing supply. Condominium supply peaked in 2013, as a total of 34,949 units were launched in Iskandar during the year, and the number came down to 12,934 units in 2014. In comparison, there were only 22,000 units launched in Kuala Lumpur in 2013.

Housing prices in Johor may be vulnerable. The take-up rates for projects launched 6-12 months ago are still at 20-40%. Ground checks reveal that some foreign developers have offered high commissions to external property agents to push sales. Price-cutting for certain clustersof high-rise projects may have started, with prices 20-30% lower from launch levels. Still, pricing for local and more reputable developers still remains sticky at this juncture. We do not discount the possibility that price-cutting may become more widespread over the next year –particularly in the high-rise segment, given the incoming supply.

Will foreigners become buyers again? While some believe foreigners may return to the local property scene as the MYR has weakened significantly, we think otherwise. The historical trend and current state of the Johor housing market, as well as currency and economic volatilitiesin the Asian markets may deter foreign buyers.

Sector view. Avoid property stocks. While share prices have corrected,there could be another 5% downside before they hit pre-2013 general elections (GE) valuation levels, ie -1SD from the mean discount to RNAV for the sector. Maintain NEUTRAL.

Commercial/business activities are desperately needed. In order to reviveinterest in the Iskandar property market, more local and foreign investments in sectors other than property are needed. It was unfortunate that the China Mall trade centre project (1.4m sq ft) in Gerbang Nusajaya was aborted a few months ago.While Pengerang has been identified as the location of the regional oil & gas hub, theindustrial, manufacturing and logistics sectors could be up for expansion at the Nusajaya and Gerbang Nusajaya sides, given their proximity to Singapore’s Jurong area. Only with meaningful economic activities can the Iskandar property market revive and the supply of housing be absorbed, in our view. The high-speed rail link would then become a real catalyst to the region.