JP Morgan: Buying opportunity in property share price weakness

KUALA LUMPUR: JP Morgan Asia Pacific Equity Research said any weakness in share prices from the Bank Negara Malaysia announcement on the imposition of a 70% loan-to-value cap (LVR) on mortgages for third properties as “a buying opportunity”.

In a research note issued on Thursday, Nov 4 it said the new ruling was clearly targeted at speculative buyers. Genuine first and even second time home buyers would not be affected, and would still be able to obtain financing of up to 90%.

“This is in line with guidance and not a surprise to the market. The government has already provided hints on this possibility over the past couple of months. Note however that even prior to this, banks have generally been stringent with the previous 90% ceiling LVR already not a common practice as much depends on the credit profile of each customer,” it said.

JP Morgan said on balance, it remains positive. In the short term, developers with higher exposure to the more speculative condo/high rise market (namely in the KLCC and Mont Kiara area, Klang Valley) and even for high-end landed properties in certain limited hot spot locations in Klang Valley (i.e. Desa Park City, Mutiara Damansara) and in Penang, could see some softening in demand.

“Overall however, we believe the move is positive for the long term sustainability and health of the sector,” it said.

It maintained its overweight on IJM Land and SP Setia, but preferred the former on valuation. The more speculative condominium market accounts for no more than 20% of sales for SP Setia and 35%-40% for IJM Land.

“For IJM Land, its strong branding, attractive product portfolio at the 'Light' project, and shortage of land in Penang island, also means that it should continue to fare better than most other condo developers, in our view,” it said.

JP Morgan said both companies could also benefit from upside to earnings from new projects i.e. from the commercial KL Eco City project for SP Setia to be launched by year-end, and from the Canal City residential project for IJM Land to be likely launched in 2011.

“We see any weakness in share prices from this announcement as a buying opportunity,” it said.

It said IJM Land was currently trading at a 30% discount to its RNAV of RM3.80/share, while SP Setia is already trading close to its RNAV of RM5.20/share.

During periods of strong liquidity and foreign inflows back in 2007 coupled with healthy sector fundamentals, SP Setia traded up to a 20% premium to RNAV.

By The EDGE Malaysia