Friday 28 March 2014

Staying cautious on Malaysian properties

In 2010, the top 8 listed property companies in Malaysia (excluding IOI Properties Group which was listed in 2014) sold an aggregate RM8.2 billion value of new properties. In 2011, total sales value rose to RM12.1 billion.

By 2012, sales value grew further to RM15 billion and exploded to RM21.9 billion last year. Within just four short years, the largest 8 listed property companies in Malaysia grew their sales value by 165% or at an annual compound rate of 27.5%.

Over the same period, property prices increased by 38.2%, using the MHPI index.
Therefore, total annual units sold increased by 127% over the four years period.

What does this mean? These 8 developers sold 50% more in terms of units in 2012 as compare to 2010 and in 2013, they sold twice the number of units as they did in 2010.

Developers took advantage of the very strong property market in terms of demand and favorable prices, with banks aggressively providing mortgages. This is what you would expect in a competitive business environment.

As a result, the property market is in excess supply!

We know the sales translate to new construction and in the books of these companies, unbilled sales. Revenue will be recognized over the construction period, where these companies will be able to report rising profits.

Once completed, between 24 months to 48 months from sales, depending on landed or high-rises, these homes need to be occupied or they will be left vacant. How much will rentals, especially of older homes, be driven down?

Already signs are emerging of rising mortgage defaults in the commercial banks. Consequently, banks are turning down a large percentage of applicants, thereby, reducing properties sales by developers over the past few months.

Our analysis imply the following conclusions:
  1. Rental yield will fall, just as interest rates are beginning to rise. Consequently, property prices will likely be subdued. We do not expect prices to fall substantially given land values, rising construction costs and the historical trends.
  2. New sales of properties for 2014 will fall as demand slackens.
  3. While revenue recognition of listed property companies will be positive in 2014 and only peak in 2015, earnings are likely to peak this year. This is because margins for 2015 will be lower due to higher costs of construction, partly from absorbing the GST tax. 
The Edge this week carries the full report. 

Friday 21 March 2014

Strong FDI growth a bright spark

In last week’s issue, we indicated that it was a bit too early to be bullish on exports to boost Malaysia’s economic growth. Slowing growth in China, the “disconnect” of the US economy from Malaysian export performance and ominous signs from the hard commodities sector about the state of the global economy point towards sluggish export growth. 

This week, the spotlight is on private sector investments. It also comes in the wake of Bank Negara Malaysia (BNM) forecasting 2014 real gross domestic product (GDP) growth of 4.5% to 5.5% versus the market consensus of 5%. Can the private sector deliver enough investment growth to power the economy?

Historically speaking, yes.

Since 2010, the private sector has registered strong double digit growth in investments. By growing at an average annual rate of 16.1%, it has outpaced average private consumption growth at 7.2% and helped cushion the substantial contraction in Malaysia’s net exports.  

The strong growth has also driven private sector investment expenditure to become the second largest contributor to Malaysia’s GDP at 16.9% in 2013, placing it behind private consumption at 52%.  What has caused the recent emergence of the private sector as a growth driver?

The answer lies in the government’s Economic Transformation Programme (ETP), which was launched in October 2010 and implemented by PEMANDU. The goal of the ETP is to elevate Malaysia to developed-nation status. One of the ways is by attracting US$ 444 billion in investments. Of this amount, 92% is targeted to be driven by the private sector. 

With such robust growth coming from private sector investments, it appears that the economy has a steady growth driver to depend on. The 10th Malaysia Plan (10MP) states that for Malaysia to become a high-income nation, private sector investment growth has to average 10.9% annually. Historical growth since 2010 has already beaten this benchmark.

However, investors always need to be vigilant about the downside risks in the future. There could already be signs that private sector investments might grow at a slower pace.

Read the full article in The Edge this week.