Property Developers - Of RPGT and GST… Get ready for demand to surge!

Property sector-wise, expecting only RPGT hikes for Budget-2014. For the upcoming Budget-2014’s potential impact on property sector, we are only expecting RPGT hikes (30% from 15% for properties sold within 2 years, 15% from 10% for properties sold within the 3-4 years, 10% remains unchanged for properties sold in the 5th year and zero RPGT for properties sold in the 6th year onwards). We believe this has been largely been discounted and priced-in somewhat, but we do expect some slight knee-jerk reactions for a couple of weeks post announcement. We do not expect any other overly harsh measures (e.g. stamp duty hikes, banking measures) as these may have severe repercussions on the economy. Historically, the government only implements one drastic fiscal measure within a year. This also applies to Bank Negara Malaysia’s (BNM) measures and so far, we have already seen one i.e. reduced mortgage tenures to 35 years from 45 years in Jul-13. We also expect more measures on increasing affordable housing supply to be announced in the Budget.

If GST is implemented in 2015, expect pre-implementation ‘panic buying’ i.e. in 2014, assuming no major changes in the banking sector policy affecting the sector. Experience from other countries had seen such trends in anticipation of future cost push inflations on asset prices. This will be beneficial to developers’ 2014 sales, as financing terms for the primary market is more favourable compared to that of the secondary (e.g. DIBS, rebates, LTVs, lending rates, property valuations, etc.) and we do expect developers to front-load their launches in 2014 on the back of higher demand, which will be a big booster to future earnings. However, if the GST implementation timeline is not announced during Budget-2014, we may revisit our stock/sector calls.

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n the case of the Johor property market, we may likely see two measures by year end: (1) Restricting foreign buyers from buying secondary properties from locals although they will be allowed to buy from secondary properties owned by other foreigners, and (2) new property levies on foreign buyers (proposed 4%-5% tax rate of the sales price, with the proposal to be made by year end). Measure (1) will actually bode well for the rental market and new launches i.e. developers while measure (2) is unlikely to slow down demand from foreigners, especially Singaporeans, as properties in Singapore are 3x-5x more expensive than Johor. Neither will demand be overly deterred by new levies on foreigners buying properties in Johor as Singapore’s entry, exit and holding costs for property investment are much steeper while Johor property values are significantly cheaper than Singapore.

We expect large developers to stage a rebound by year end as they have corrected the most. We also note that larger cap developers’ valuations are trading below average to trough levels post the sell-downs in 3Q13, suggesting limited downside risks. Under our coverage, this is applicable to UEMSUNRISE (OP; TP: RM3.70), IJMLAND (OP; TP: RM3.60) and MAHSING (OP; TP: RM2.56). We also believe there will be more positive news flow by year-end (e.g. Singapore-Johor RTS, Pengerang news) while 2015 will see potential IPOs and listing entry of new companies (e.g. Medini Iskandar, IWH, Eco World’s RTO of Focal Aims).

Reiterate OVERWEIGHT on developers. In our universe, most of the developers results were within expectations while sales assumptions are mainly intact, which support the next one year’s earnings visibility. We are likely to maintain OVERWEIGHT until 2Q14, baring any unforeseen negative policy measures on the sector. UEMLAND will be our TOP PICK for 4Q13 while we also like IJMLAND as our second preferred pick.

Risks to our sector call. If one or more of the high risk measures are announced, in addition to the RPGT hikes, we may look to downgrade the sector to NEUTRAL/UNDERWEIGHT and have provided a worse-case scenario tentative CALLs/TPs for the stocks under our coverage.