Thursday, September 19

Unexciting sales outlook for properties despite relief from GST

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KUCHING: As property developers continue to miss expectations of Kenanga Investment Bank Bhd (Kenanga Research) — signifying a decline in the sector’s performance, analysts said it was harder to predict sales momentum this year as most developers are actively clearing inventories or properties close to completion.

Kenanga Research in its sector overview noted that performance of property developers was worse than the previous quarter.

Out of 13 developers under its coverage, 46 per cent missed expectations, only one stock exceeded expectations while the rest were within to broadly within.

“This is worse than last quarter whereby 31 per cent of coverage disappointed while 31 per cent positively surprised,” it said in the note yesterday. “The main issue faced this quarter were margin compressions arising from higher overheads and lower product margin mix.

“More misses with headline sales with 38 per cent of our coverage were behind in terms of meeting targets while the rest were in-line to broadly in-line.”

The research firm observed that many developers held back new launches running up to the 14th General Election (GE14) as buyers were holding back given the uncertainties.

“Also, this year, most developers are looking to clear inventories and take-up rates of these inventories can be sporadic or unpredictable,” it added.

“We are observing very heavy marketing campaigns by most developers such as rebates, discounts, freebies, ‘deferred payments’ on differential sums for shortfalls seen in many buyers’ margin of finance.

“Thus, there is still possibility that developers could play catch-up with sales in coming quarters. Noticeably, the big-boys were mainly on track with sales targets largely due to their stronger marketing ability and wider market reach, while the smaller players saw weaker sales performances.”

Looking ahead, the sector’s sales outlook remained unexciting, Kenanga Research said, on the back of earnings risks due to margin compressions.

This was in spite of a reduction in the Goods and Services Tax (GST) to zero which would offer some relief for developers’ margins and allow them to pass on savings to buyers to improve affordability.

“However, since most developers’ product pipelines are largely residential and GST savings will only be felt in the newer launches, impact on margins may not be immediately significant. As a result, we do not think this will be seen as a major catalyst for the sector,” it said.

“Additionally, we note that developers are giving discounts, rebates and freebies and are extensively using agents to clear inventories, which will also have negative implications on margins.

“Nonetheless, we reckon that it is better for developers to clear inventories to unlock capital rather than retaining margins at this juncture.”

Kenanga Research saw that it was harder to predict sales momentum this year as most developers are actively clearing inventories or properties close to completion, adding that works in progress or inventories hit a record-high last year.

“As a result, momentum of sales will be tougher to predict unlike new launches. Thus, sales delivery this year could be lumpy.

“While we agree that value for the sector has emerged, we believe the sentiment on the sector will be subdued due to oversupply and affordability issues. Policy clarity on the sector will likely be opaque until Budget 2019.”