KAF Research has downgraded the local property sector to 'neutral', claiming that Malaysia has missed out on the global real estate reflation due to a combination of factors including low-income growth and low expectations for capital values.
Despite a post-pandemic economic recovery, the property cycle is slowing this time around, it said.
"Developers may soon guide for lower presales target, given recent poor performance. This will continue as the interest rate rises. With rising input costs and the absence of pricing power, (we believe) presales will continue to be scaled down," it said in a note on June 8.
The research house has reduced the sector's revalued net asset value (RNAV) by 15 per cent to reflect higher discount rates and weaker new term sales assumptions.
The developers covered by the firm (Exhibit 1) reported lower year-on-year (YoY) sales in the first quarter of 2022 (1Q22).
With the additional sales contribution from Eastern & Oriental (E&O) Bhd's maiden launch at Andaman in Penang, the developers' sales had contracted by about 14 per cent YoY.
"Recall that E&O had not been launching much in the past couple of years as its major landbank in Penang was under reclamation. Excluding the additional sales contribution by E&O in 1Q22, the developers would have recorded even weaker sales (negative 20 per cent YoY).
"In general, all developers had either set higher presales targets or maintained presales targets at 2021's sales number, that is flattish presales guidance. However, based on 1Q22 sales performance, we have observed a strong YoY sales contraction. This is in the absence of Home Ownership Campaign," it said.
According to KAF, the big developers focusing on properties priced below RM500,000 per unit were having difficulty staying on track to meet year-end presales targets.
S P Setia, for example, reported sales of only RM679 million in 1Q22, a 43 per cent decrease YoY. The developer's 1Q22 sales accounted for only 17 per cent of its RM4 billion year-end presales target.
UEM Sunrise Bhd reported sales of only RM110 million in 1Q22, a 59 per cent YoY decrease. Its 1Q22 sales accounted for only seven per cent of its RM1.5 billion year-end presales target.
Other smaller developers focusing on properties priced above RM500,000 per unit, according to KAF, were still experiencing sales growth in 1Q22.
"They are on track to achieve their year-end presales target. Demand for this category is still strong as properties priced above RM500,000 a unit are still exempt from stamp duty, until the end of 2025, an element that is missing in other properties that are priced below RM500,000 a unit," it said.
KAF said, as a result, the firm cut its presales target for S P Setia from RM4 billion to RM3 billion in 2022F.
"We also cut our presales target for UEM Sunrise from RM1.5 billion to RM1 billion in 2022F. Therefore, we downgrade our recommendation on S P Setia from 'buy' to 'hold' with a reduced TP (target price) at RM0.95 from RM1.60. This is as we cut our presales target and increased our discount to its RNAV to 70 per cent.
"We have applied the same method (different quantum) with UEM Sunrise post its 1Q22 results. Hence, no changes are made on its recommendation, TP, and forecasts," it said.
Developers are more cautious with their launches this year
During the pandemic (2020 and 2021), developers significantly reduced launches and focused on inventory clearance. As a result, developers in general set more aggressive launch dates this year.
In total, developers covered by the firm planned to double their launches (Exhibit 11) to RM13.5 billion in 2022F. (2021: RM6.5 billion).
"However, in 1Q22, we have noticed that only c.10 per cent of the above-mentioned planned launches had been launched in the said period. Developers are now being cautious in their launches due to the rising material costs and labour shortage. This is because, upon launches, the developers would need to secure raw materials or contract construction works via tender.
"With the lock-in prices at elevated levels, this would impact margins on launched projects. As it is, the developers had experienced a cost run-up in their newly launched projects, that is, actual awarded tender value vs pre-tender estimates costs.
"Presales targets set by developers earlier this year were partially justified by their aggressive planned launches. However, as developers are being cautious in their launches, there would be a potential cut in their planned launches, hence a potential cut in their presales targets," it said.
Following some missed sales in 1Q22, KAF has reduced its presales targets for developers under its coverage from RM10.7 billion to RM9.2 billion in 2022F. This implies a nine per cent reduction in presales targets in 2022F compared to actual sales achieved in 2021.
The firm has a 'buy' rating on smaller developers such as Matrix Concepts Bhd, Mah Sing Group Bhd, and LBS Bina Group Bhd, which focus on properties priced below RM500,000 per unit.