Property Monthly Review: November 2008

December 2, 2008 at 6:33 am Leave a comment

• Major shareholders increasing their positions.
Last month, we saw a general trend of support by major shareholders of property stocks under coverage. November also saw the introduction of new major shareholders. The first is PNB with a 5.0% stake in SP Setia
while the other is Brahmal A/L Vasudevan, reportedly a close associate of tycoon K Ananda Krishnan, with a 5.2% stake in Glomac.
• Property down cycle not as bad as the Asian financial crisis
Following a property talk held last month, we upgraded the sector from underweight to neutral as we believe the current down cycle is not as bad as the Asian financial crisis. Most of the bad news have already been
priced in. For further details, please refer to our property sector report “Is the Property Market Resilient?” issued on 24 November 2008.
• Minor booster from economic stabilisation plan
The government announced a few measures as part of its economic stabilisation plan to boost the waning property sector. Foreigner no longer require FIC approval for the purchase of commercial properties priced at
RM500,000 and above and for own use. Other measures include more allocation for low-cost housing, extending government housing loan tenure from 25 years to 30 years. To boost its coffer, the government will also call for competitive tender for several land parcels it owns in the capital city.
Despite the measures announced by the government, industry players felt more could be done for the sector and has put forward several proposals to the government for considerations.
• Investors getting jittery
Signs are emerging that property investors are getting jittery over the worsening global economic conditions. Last month, IOI Corporation (IOI MK, Buy, TP: RM4.00) aborted the purchase of Menara Citibank, a grade
A office building in the vicinity of KLCC, and will forego its RM73.4m deposit. Against such a backdrop, we expect developers to defer and/or scale back their planned launches.
• Maintain NEUTRAL.

Share price performance

Property stocks ended mixed last month with YNH Property the biggest gainer among property stocks under coverage. On notable filings by major shareholders in November, we saw a general trend of support by major shareholders. The only exception was the trimming of EPF’s holdings in YNH Property from 6.8% to 6.3%. November also saw the introduction of new major shareholders. The first is PNB with a 5.0% stake in SP Setia while the other is Brahmal A/L Vasudevan, reportedly a close associate of Tycoon K Ananda Krishnan, with a 5.2% stake in Glomac.

Property down cycle not as bad as the Asian financial crisis
Last month, we organised a property talk for more than 100 participants comprising mainly of fund managers. We have invited property consultants from Regroup Associates as speakers to shed some light on whether the Malaysian property market is resilient to ride out the economic downturn and we came away from the talk with reinforced belief that the current property down cycle is not as bad as the Asian financial crisis. We carried out a “crash” test and noted the following: (1) risk of declining sales is moderate and not likely to crash, especially residential properties, (2) further risk of margin erosion is minimal as building materials prices have stabilised, (3) developers are in better financial position now as leverage is half that of the 1998 Asian financial crisis, and (4) property stocks are already trading at “mini” distressed valuation last seen in 2001. Based on our findings, we upgraded our call on the property sector from underweight to neutral. Although there may be more negative news in the near term, we believe most of the bad news have
already been priced in. However, the change in our stance is more of turning less bearish than turning bullish, as property stocks will still operate under challenging environment over the next 6 – 12 months.

Minor booster from economic stabilisation plan
The property sector received a minor booster last month when the government announced the following measures as part of its economic stabilisation plan: 

- Foreigners buying commercial properties priced at RM500,000 and above and for own use will no longer need to procure the approval of the Foreign Investment Committee (FIC). Minimal impact is expected from this measure as the market’s expectation was for a more widespread liberalisation involving purchase of commercial properties for investment purposes as well.
- To address declining housing affordability among lower income earners, the government has allocated RM1.2bn to various government agencies to build more low and medium cost housing. Another RM200m will be allocated to Syarikat Perumahan Negara Bhd to revive abandoned housing projects while MARA will build more business premises in rural areas with an allocation of RM100m.
- Other measures proposed include extending the government housing loan tenure from the current maximum 25 years to 30 years which is a definite booster to housing affordability among civil servants. Developers such as YNH Property which has captive demand for its projects in Manjung from the naval personnel at the nearby Lumut naval base will benefit from this move.
- To boost its coffer, the government will also develop land it owns in several strategic locations in the city including the Rubber Research Institute (RRI) in Sungai Buloh and government land in Jalan Cochrane and Jalan Ampang Hilir. The development would be done on a competitive tender basis, open to all in the private sector and government-linked companies (GLCs). Listed developers with a good track record may be in a good position to land some of these projects. However, development margin may be thin due to the competitive open tender.

There were also talks that the government may further relax rules for the Malaysia My Second Home (MM2H) programme to allow foreigners to work in certain sectors. The move is expected to attract more foreigners, especially those with certain skills, to buy homes in Malaysia. It is not yet clear which sectors could be liberalised for MM2H participants but the services industry is touted as a strong possibility. According to sources, deliberations are ongoing at the sub-committee level of the National Economic Action Committee in the Prime Minister’s Department.

Industry players lobbying for more incentives
Feeling more could be done for the waning property sector, property players through the Real Estate and Housing Developers’ Association (REHDA) are seeking more incentives from the government to boost declining sales. Proposals which have been put forward to the government include:
- a one-time grant of RM10,000 and full stamp duty exemption to first-time house buyers;

– allow interest paid on housing loans be offset against personal income in income tax calculation;

- houses set aside for Bumiputeras be opened up to others if there are no Bumiputera buyers within six months or halfway through the construction period, whichever is earlier. Currently, developers must set aside up to 30% of available units in a housing scheme for Bumiputeras, and these are offered at 5% to 15% discounts; and,
- the authorities to take over the development of low-cost housing.

Investors getting jittery
Signs are emerging that property investors are getting jittery over the worsening global economic conditions. Last month, IOI Corporation (IOI MK, Buy, TP: RM4.00) aborted the purchase of Menara Citibank, a grade A office building in the vicinity of KLCC, and will forego its RM73.4m deposit. Other deals which have fallen through include the proposed joint venture by DutaLand Bhd (DTL MK, not rated) and Olympia Industries Bhd (OLYM MK, not rated) with Stonehage Westcity Property Fund Ltd on the development of a 8.874- acre land in Mont’ Kiara/Sri Hartamas. We also noted that sale of several blocks of Fraser Business Park, which is developed by Fraser & Neave Holdings Bhd (FNH MK, not rated), have been terminated following buyers’ failure to meet their progress payment obligations. Against such a backdrop, it is not surprising to see developers deferring and/or scaling back their planned launches. For example, Magna Prima Bhd (MAGNA MK, not rated) scaled down its Magna City project by removing a mall and hotel and focus on apartments, shops
and offices. This will almost halve the project’s gross development value from RM1.1bn to RM600m.
Going forward, more planned launches of commercial properties may be called off, especially when developers could not secure en bloc purchasers before construction starts.

Other notable property news
• ING acquired Menara Standard Chartered on Jalan Sultan Ismail in Kuala Lumpur from Singapore’s GIC Real Estate Pte Ltd for RM328.35m. Based on a net lettable area of about 345,000 sq ft. for the 45-storey building, the transaction was done at RM952 psf.
• Pramerica Real Estate Investors (Asia) Pte Ltd, the real estate investment arm of Prudential Financial Inc, will invest some RM1.1bn in four malls in the Klang Valley and Penang through a real estate fund known as the Asian Retail Mall Fund (ARMF). Pramerica is currently looking for tenants to fill up about 1.8m sq ft in the four malls amid a saturated retail property market as well as sluggish retail sales growth.

Comments:
3Q08 reporting season was pretty much the same as the last quarters as developers generally came in short against expectations due to margin erosion and lower sales.

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