KUCHING: Malaysia’s property sector is set to witness lower demand during the coming months with industry sources declaring a cautious outlook for the third quarter of 2011 (3Q2011).
SEVERE IMPACT: The impact will be more severe especially for those that have aggressively replenished their development landbank, Loong notes, as expensive land cost and longer turnaround period will mean high land holding costs.
A senior analyst from RHB Research Institute Sdn Bhd (RHB Research), Loong Kok Wen, reiterated that the cautious outlook on Malaysia’s property sector was based on a historical pattern evidence.
“Looking back to the historical pattern since 2002, a property upcycle normally lasts for two years. Based on historical data we are currently almost two years into a property upcycle,” she affirmed in her online report.
“While the physical property market may still remain strong until the end 2011, we believe the timing now is appropriate to keep a watchful eye on property stocks as well as the sector outlook, as share prices are normally priced in six to nine months ahead.”
In fact, Loong believed that market sentiments would turn slightly negative and expected demand to start softening possibly next year due to several key concerns.
Among these concerns were a higher risk profile due to massive credit growth driven by liquidity, further monetary and regulatory tightening measures, rising inflationary pressure and negative sentiment from regional property sector downgrades.
“We believe the weak market sentiment on property stocks in China, HK and Singapore that spilt over to Malaysia was based on Standard & Poor’s downgrading China’s property market outlook in June this year from ‘stable’ to ‘negative’ in view of increasingly challenging credit conditions.
“For Malaysian developers, most of the property developers under our coverage have a reasonable net gearing of about 0.2 to 0.4 times. However, if interest rates rise sharply and undermine liquidity in the system, property sales and hence developers’ cash flows will be adversely affected.”
The impact would be more severe especially for those that have aggressively replenished their development landbank, Loong noted, as expensive land cost and longer turnaround period would mean high land holding costs.
As an alternative option to properties, the analyst highlighted the retail segment as a preferred choice at the moment.
“As the residential segment will be subject to most policy interventions and the office segment will face massive oversupply, we are positive on the retail sub-segment, which has relatively lower supply,” she affirmed.
“The appetite of local and foreign institutional funds to own strategic retail properties is strong due to higher growth potential for consumption in Asian countries, compared with western countries.
“The cap rate-to-yield for retail properties in Kuala Lumpur is attractive at 11.6 per cent, implying higher potential for assets monetisation.
“We hence prefer developers that own retail property assets, whose market value is relatively inelastic as that will help to mitigate sensitivity of revised net asset value and cyclical property development earnings,” she concluded.