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Monday, October 28, 2013

Real Estate - Budget 2014 Measures To May Deal a Blow


The  property  cooling  measures  announced  in  Budget  2014  will  be adequate to curb speculation and ensure healthy growth of the property industry.  Although sector valuations have factored in the policy risk to some  extent,  we  see  downside  potential  for  the  valuations  of  some stocks, particularly those that are highly exposed to the Iskandar region and have high foreign proportion of buyers. Maintain NEUTRAL.
  • Needs  time to heal.  In the face of  the  new property  cooling  measures, we  expect  the  current  consolidation  in  property  demand  and  prices  to continue.  Based  on  past  experience,  the  market  is  likely  to  need  3-6 months to adjust to the regulation changes.
  • Iskandar  the  worst  hit.  Developers  which  have  high  exposure  to  the Iskandar  region  will  be  the  most  adversely  affected.  The  30%  Real Property  Gains  Tax  (RPGT)  imposed on foreigners for disposals  within the  first  five  years  will  discourage  short-term  foreign  speculators  from buying properties. The holding period of a minimum of five years is the key deterrent. According to CBRE, foreign purchasers account for 54% of high-rise residential sales in Nusajaya and 39% in JB city a s well as the  major  suburbs.  Although  the  demand  for  certain  attractive  projects will remain, we expect a knee-jerk slowdown in  overall  sales in Iskandar in the near term as the market is now less attractive than in the past.
  • Penang  mainland  still  healthy.  The  Penang  mainland,  on  the  other hand,  will  still  see  healthy  growth  as  local  property  demand  is  largely driven  by  genuine  buyers  for  occupancy  purposes.  Job  opportunities created by both  foreign and local MNCs  and the opening  of the Penang Second Bridge remain the key catalysts for demand growth.
  • Developers relying  on local buyers will fare better.  Local buyers are still  the  main  stream  of  sustainable  buyers.  The  silver  lining  will  be developers  which  concentrate  on  affordable  housing  and  township developments.  High-rise  and  luxury  segments,  in  particular,  will  likely see a temporary slowdown in demand.
  • Maintain NEUTRAL. Stick with IJM Land and Tambun Indah. We see no relief for the sector as the new measures will have an overall negative impact on developers. Maintain NEUTRAL on the sector. We continue to like IJMLD and Tambun Indah  given the  companies’  solid fundamentals and minimal exposure to foreign buyers.
Targeting Speculators
Key measures tabled in Budget 2014:
  1. The  Real  Property  Gains  Tax  (RPGT)  on  properties  disposed  within  the holding period of up to three years is raised to 30%, whereas for disposal within the holding period up to four and five years, the rates are increased to 20% and 15%, respectively. For disposals made in the sixth and subsequent years,  no  RPGT  is imposed on  citizens,  whereas companies  are  taxed  at 5%.
  2. For  non-citizens,  a  30%  RPGT  is  imposed  on  the  gains  from  properties disposed within the holding period of up to five years, and for disposals in the sixth and subsequent years, a 5% RPGT is imposed. The new tax regime (1 & 2) will be effective from 1 Jan 2014.
  3. Raising  the  floor  price  of  properties  for  foreign  buyers  to  MYR1m  from MYR500k.
  4. Removal  of  Developer  Interest  Bearing  Scheme  (DIBS).  Financial institutions are prohibited from providing final funding for proje cts involved in the DIBS scheme.
  5. To increase  transparency in property sales prices, whereby detailed sales prices including all benefits and incentives will have to be displayed.
  6. Introduction of Private Affordable Ownership Housing Scheme (MyHome) to encourage private sector to build more low-  and medium-cost houses. The scheme provides a subsidy of MYR30k to the private developers for each unit built. Among the criteria for the scheme are:
  • Build at least 20% low-cost houses and 20% medium-cost houses in a housing project
  • The  maximum  price  of  low-cost  houses  is  MYR45k  and  medium-cost houses is MYR170k
  • First-time  buyers  with  a  monthly  household  income   of  MYR3k  are eligible  for  low-cost  houses,  whereas  those  with  a  maximum  monthly household income of MYR6k are eligible for medium-cost houses.
Still bearable for locals.  While some measures were within our expectations, such as  an  increase  in  RPGT  for  the  locals,  higher  floor  price  for  foreigners  and  the removal  of  the  DIBS,  one  new  measure  was  rather  unexpected  –  the  significant
RPGT imposed on foreign buyers. Compared to previous  budgets, Budget  2014 has the  most  punitive  combination  of  measures  for  the  property  sector  as  the Government  strives  to  keep  speculation  in  check,  targeting  both  local  and  foreign buyers  alike.  This  is  also  part  of  the  Government’s  efforts  to  contain  the  rising household  leverage  in  Malaysia.  Such  measures  will  help  ensure  the  long-term healthy growth of the property industry.

The 30% tax rate on local property owners has been extended  for another year, ie disposal within three years vs.  two years previously  (from 2004 to 2007).  Among all the measures,  we believe  the  impact of  a  higher RPGT  on  local property owners is
relatively mild. This is because  most of the new properties will take  2-3 years to be completed, and hence sellers will be subject to  a  lower gain tax bracket in year 4, which is at 20% under the new regime  (vs.  30% in year 1-3),  double  the previous 10% tax rate under the old regime. Historically, when RPGT was imposed, the house price index (HPI)  typically  declined for 2-3 quarters  before a rebound was seen. We expect the same trend to take place this time round.
Iskandar the hardest hit

The  30%  RPGT  for  foreigners  for  disposals  within  the  first  five  years  will  wipe  out short-term foreign speculators to a certain extent, as the holding period of a minimum of  five  years  will  drive  them  away,  in  our  view.  The  higher  floor  price  is  another deterrent  for  foreign  buyers  in  Iskandar,  particularly  for  investment/speculative purposes.  Developers  with  high  exposure  to  the  Iskandar  region  will  be  the  most adversely affected as the area has gained significant traction among foreigners over the  past  1-2  years,  especially  among  Singaporeans  due  to  the  strong  SGD. According  to  CBRE,  foreign  purchasers  accounted  for  54%  of  total  high-rise residential  sales  (sales by  developers)  in  Nusajaya,  and 39%  in JB city  and major suburbs.  Property  prices  have  also  risen  sharply,  with  the  pricing  of  some  new launches  already  matching  those  of  KL  city  centre  condominiums.  Medini,  in particular, which has no  Bumioutra  quota  (although no minimum price restriction for
foreigners), will likely see a knee-jerk slowdown  in property sales over the near  term, as the market is now less lucrative compared to  before.  While there is still  demand for  some  attractive  projects,  compared  to  a  simple  buying  decision  previously, potential foreign buyers will now have to think twice before  purchasing properties in Malaysia.  Based  on  official  data,  Johor  residential  and  commercial  property transactions  historically made up 10-12% of the total transaction volume in Malaysia.
Although the percentage is higher for Selangor (ie 25-28%), the transaction volume in the Klang Valley is largely made up of Malaysian buyers . Therefore, we are  not too concerned on developers that concentrate in KL and Selangor.

As a result of the RPGT hike, and hence potentially higher land holding costs,  land transactions  in  Iskandar,  especially  from  overseas  developers,  may  slow  down  as property sales will likely languish over the next six months. Given such a situation, we
are now uncertain if the Johor state government will  still go ahead with  the  proposedm 4-5% processing fee that will be imposed on foreigners, as the  impact of the  30% RPGT is already detrimental.

Developers  which  have  exposure  to  Iskandar  include  UEM  Sunrise,  Sunway,  SP Setia, Mah Sing, KSL, and to some extent, IJM Land and E&O.
Penang mainland still healthy
Penang  island  will  see  some  impact,  although  this  will  likely  be  less  significant compared to Iskandar. The number  of foreign buyers in Penang island is not large in our  view,  and  they  are  mainly  concentrated  in  Seri  Tanjung  Pinang  and  Batu
Ferringhi. In addition,  the impact of the higher floor price on foreigners is negligible in Penang island, as the Penang state government had earlier raised the floor price to MYR1m for high-rise and MYR2m for landed properties.

Penang mainland, on the other hand, will still see healthy growth, as  local property demand is largely driven by genuine buyers for owner occupancy.  Property prices are still  relatively  decent.  Employment  opportunities  created  by  both  foreign  and  local
MNCs at Batu Kawan and Seberang Prai are key to  support business activities and population expansion.  The opening of the Penang Second Bridge  in early 2014  will still  be  a  major  catalyst  for  mainland  properties.  Just  recently,  an  Italy-based  car
component maker Magneti Marelli has launched a new plant in Batu Kawan, which will create a workforce of 1,000 people. Besides this, Ibiden, Boon Siew Honda, VAT, Malaysia Automotive Lighting, Haemonetics Corporation are among the local/foreign
players which have committed their investments, and some have started running their new operations. Note also that, the global furniture maker  IKEA has been looking to open an outlet on the mainland. Positive news flow will likely continue.

No more DIBS
This measure  was expected. We believe most developers are well prepared for the removal  of  DIBS  and  will  most  likely  launch  some  new  schemes  or  incentives  to circumvent this. On the ground, we understand that some developers have already
introduced  new  incentives  for  buyers  with  the  introduction  of  “DISS”  (Developer Interest  Subsidy  Scheme),  whereby  developers  will  reimburse  the  buyers  an equivalent amount every month after buyers repay their installments to the banks.
To recap, the DIBS has been widely used by developers since the subprime crisis in 2009 to revive demand for properties. Lower upfront  entry cost is offered to buyers with only a 5% downpayment and 95% margin financing. Interest is absorbed by the
developers, and buyers do not have to pay loan installments during the period that the  property  is  under construction.  Not  many  developers under our coverage  have excessive exposure to this scheme currently,  as they have gradually withdrawn the scheme  from  some  better  selling  projects  over  the  last  1-2  years.  Currently,  most developers only offer DIBS for the slow-moving projects, mainly concentrating on the high-rise residential segment. Property price growth in the primary ma rket could see a temporary slowdown as developers can no longer mark up their selling prices  too aggressively.

Although  impact  from  this  measure  alone  would  be  minimal,  we  believe  the cumulative  impact  from  all  the  measures  imposed  will  have  an  overall  negative impact on  the sector.  Among the companies under our coverage, we see IJM Land
and  Tambun  Indah  having  the  least  risk exposure.  Sunway,  UOAD,  UEM  Sunrise, Mah Sing and E&O, on the other hand, have higher percentage of projects that come with the DIBS.
Impact of GST
In  normal circumstances, the net impact of GST will drive up property prices. While some believe that it would lead to buyers flocking to purchase properties  in  the near term  (from  now  to  March  2015  until  the  GST  starts),  we  believe  the  demand  will ultimately depend on affordability. Given all the measures  tabled  in Budget 2014, we expect property prices to continue its current consolidation trend.

Maintain NEUTRAL
Investor  sentiment  will  be  hit.  The  cumulative  impact  will  be  painful  for  property developers  in  the near term, and it will likely take about  3-6 months for the market to adjust itself.  Although  the sector valuations have factored in the policy risk to some extent, we believe  there is still  downside  to  valuations for some stocks, particularly those that are highly exposed to the Iskandar region and have high foreig n  property buying  content.  All  these  measures  are  expected  to  create  some  uncertainties  for most developers in  launching  their projects  already in the pipeline.  Developers that rely more on local buyers will fare better.  The silver lining will be developers which concentrate on affordable housing segment, such as Tambun Indah, Matrix Concepts and Hua Yang. In maintaining our 4Q13 view, we keep our  NEUTRAL stance on the sector.  We  are  selective  in  our  stock  picks.  We  continue  to  like  IJM  Land  and Tambun  Indah  given  their  solid  fundamentals  and  minimal  exposure  to  foreign purchasers.  Note  that,  IJM  Land’s  The  Light  Phase  1  is  only  left  with  the  final Collection  IV  series  and  hence  will  not  be  an issue  for  the  company.  Although  we retain  our  NEUTRAL  rating  on  UEM  Sunrise,  E&O  is kept  at  Trading  BUY,  largely because of the catalyst of upcoming approval for its Seri Tanjung Pinang 2 project, and we reiterate our view that, the stock is an attractive takeover target.
Source: RHB

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