Property developers to gain in 2010

PROPERTY developers will continue to emerge as key winners in 2010, driven by rising demand and improving economic outlook, according to an analyst at MIDF Research.

Moving into 2010, he said players would continue to ride on the sector's buoyant recovery based on the improving number of property sales coupled with declining number of overhang units since the first quarter of 2009, the analyst, who declined to be named told Bernama recently.

For 2009, it was an unanticipated recovery story as the sector had outperformed expectations in becoming one of the leading segments in the stock market.

Share price of property companies, which is measured by the KL Property Index, in fact outpaced the benchmark FBM KLCI.
However, the analyst pegged a "Neutral" outlook for the property sector in 2010.

"Despite encouraging sales demand and improving economic sentiment, the fear of demand sustainability, upon the withdrawal of cheap credit, absence of attractive promotions and favourable regulations may take its toll on the property sector," he said.

However, the growth driver in 2010 will be, among others, the favourable regulations, continuous governmental support, a thriving property market taking its cue from an improved economy and the ability to attract foreign direct investment flow.

"Sales demand for residential properties are expected to remain buoyant as investors continue to deem it as one of the more liquid hedging asset. Speculators are also taking advantage of the current market sentiment to lock-in on gains," he said.

A survey across key property players revealed that none was slowing down their pace of project development.

Many were, in fact, taking advantage of the current discounted valuations to replenish land banks and were not holding back new launches.

The analyst said key players have signaled that take-up rates of residential properties have remained strong between 80 per cent and 90 per cent in the last quarter.

"Hence, we are confident residential property sales will remain buoyant, at least within the first half of 2010. We are estimating at least 25,000 new units to be launched over the next quarter," he said.

On the retail/shopping complex and office front, he expected continued oversupply of units, notably in the Klang Valley, as many have been under construction over the past two to three years.

Many corporations and businesses are also holding back relocation plans until the financial crisis is over.

Meanwhile, issues that may dampen the sector's recovery include the re-introduction of the Real Property Gains Tax (RPGT), possible pullback in sales demand due to withdrawal of cheap credit, unanticipated rise in raw material prices thus raising average selling prices and delaying launches and approvals.

"We do not expect any immediate impact from the reintroduction of the RPGT and it was mainly to control the secondary sales market. On the flipside, it may discourage foreign investments in commercial properties," he said.

He said the tax was introduced too soon as the economy was still on the verge of recovery but understood the need for it to curb another asset bubble.

On the Real Estate Investment Trusts (REITs), the analyst does not expect it to be a star performer in 2010 but expects some interest in this segment.

He said the average rental yield for offices and commercial properties was on a downtrend in 2009, with rental for offices falling 1.9 per cent, year-on-year, and 1.35 per cent, year-to-date, within the Klang Valley.

However, the recovery in the property market coupled with an exemption from RPGT and stamp duty will see rising interest in REITs which currently yield an average return of between eight and nine per cent in Malaysia.

On the status of Malaysia's property market, the analyst said he did not expect any property bubble in the immediate-term.

"Appreciation of property prices have been modest so far as demand recovered slowly as investors' confidence returns," he added.

Prices of properties, nationwide, declined 9.8 per cent, year-to-date, due to the economic crisis, but gained 1.40 per cent, year-on-year, due to renewed interest emerging in the second quarter of 2009.

"Nevertheless, assuming the presence of cheap financing, attractive promotions and favorable regulations continue into 2010, coupled with new launches and delivery in 2010, property prices may face an upsurge," he said.

And, despite the Dubai's debt crisis, he said Malaysia would still be able to attract Middle Eastern investors who still reaped positive yields from investing in the country's property market.

The main challenges in the property market will be demand fundamentals, whether it can be sustained, and from another point of view, what else can be offered by both property players and financial institutions to support the growing demand.

"One would be cheap cost of fund (credit). Assuming overnight policy rates are raised back to pre-2006 days of 3.50 per cent, can demand be sustained? Secondly, assuming a second dip does occur, can the property segment take it in its stride?" he said.

The analyst said residential properties will continue to be favorites amongst investors who still demanded mid-to-high-end properties.

"We noted in the second quarter that properties priced between RM250,000 and RM500,000 and between RM500,000 and RM1 million were favorites and registered sustained growth," he said.

Residential properties have historically proven to be good hedge instruments with attractive capital appreciation, while commercial and office properties may see a dip in demand, against a backdrop of new launches, except for those Grade-A offices located in sub-urban areas.

Demand for properties around Kuala Lumpur City Centre is recovering as prices within the vicinity improved in the third quarter with stable rental yields.

As for industrial properties, he said the segment would move in line with the nation's economy.

The analyst was also of the opinion that the property market needed a boost in the form of incentives, that included tax reduction for sub-urban developments, cheap credit, continuous efforts to draw foreign direct investments and for local small players to have joint-ventures opportunities with state governments.

By Bernama