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Monday, May 4, 2009

ECM Libra: Too early to get bullish on property sector

ECM warns that the property sector would definitely take a beating if the influenza A reached Malaysia, similar to what happened during the SARS outbreak in 2003.

The number of property loans approved in March was higher than expected but it is still too early to turn bullish on the sector, analysts said.

Loans approved for residential properties turned positive that month for the first time in six months. It grew by 10.7 per cent from a year ago.

"Despite the positive news, it is still too early to be bullish. While conditions are favourable for property ownership, sentiment - which is a major factor in buying decision - remains below neutral level.

"It is still too early to tell whether buying activities could be sustained for the remaining months of the year," ECM Libra Investment Research said in a note to clients recently.

It would take a convincing bottoming of the global economic contraction to boost sentiments, it added.

There was a 49.1 per cent increase in approved residential property loans and a 31.1 per cent increase in non-residential loans in March compared with a month earlier.

"While we expected aggressive sales promotions by developers since late January 2009 to have positive impact on property sales and loan approvals, (this is) much stronger than our expectation," ECM remarked.

The higher loan approvals may also have been driven by consumers refinancing their existing mortgages.

ECM noted that incentives to buy property are more compelling now as the average lending rate is at a record low of 5.16 per cent.

Also, developers and banks are absorbing significant amounts of upfront costs such as legal fees, stamp duties and interest costs during the construction period.

Sales declined in the previous months mainly because prospective buyers had taken a "wait-and see" approach given the high inflationary environment and deteriorating economic outlook.

ECM kept a "neutral" stance on the property sector, saying that unless there is a full-blown swine flu outbreak in Malaysia, most bad news have already been factored in.

It said the property sector would definitely take a beating if the flu reached local shores, similar to what happened during the SARS outbreak in 2003.

Its top stock picks are Sunway City and Sunrise.

By Business Times

Penang sees drop in retail occupancy

The occupancy rate of retail space in Penang has dropped to 67%, compared with about 70% a year ago, while the occupancy rate of office space has remained at 75.5%, more or less the same as in 2008.

Henry Butcher Retail managing director Tan Hai Hsin said Penang currently had about 14 million sq ft of retail space, of which 33% is vacant.

“There is higher vacancy because of the poor occupancy rates at old shopping centres that have yet to be revived as well as new shopping centres that are not able to achieve full occupancy after opening,” Tan told StarBiz.

Tan said poorly occupied shopping centres in Penang were still unable to overcome their problems such as lower shopping traffic, reduced customer spending, existing tenants unable to keep their businesses, and the inability of landlords to retain tenants.

“New shopping centres opened during the last few years are still working hard to fill up their retail lots,” he said.

Retail rentals have so far remained stable, despite the economic crisis.

Depending on the location and condition of the shopping mall, rentals for the ground floor ranged from RM2 to RM29 per sq ft.

For the first floor, the rentals ranged from RM2 to RM18 psf, depending on the location and shopping mall’s condition.

“No average figure can be derived for the expected fall in rental rates for shopping centres in the northern region.

“This is because the impact varies among shopping centres. For popular and successful shopping centres, they may not be lowering their rental rates,” he said.

“If any, it will be in the form of rental rebate and discount. The discount may range from 5% to 10% only, which is not given to all tenants in the shopping centres, and depends on the bargaining power of the retailers.”

He said the poor-performing shopping centres might have to give discounts (5%-30%) to retain tenants. “Again, this depends on the bargaining power of the tenants.”

For new shopping centres, he said, they might have to give temporary discount and longer rent-free period to attract new retailers. “Once again, this depends on the bargaining power of the tenants and the landlords.”

The retail market in the country was expected to turn negative in the second quarter, he said, adding that by the third quarter, retail sales would improve and climb slowly back to positive zone.

“For the whole year, retail sales for the whole country should record a 3% growth rate,” he added.

Tan said popular shopping centres in Penang would not suffer a large decline in shopping traffic.

“Newly-opened shopping centres during the last few years will have to work hard to draw in more retailers and shoppers.

“Shopping centres targeting for opening in the next two years will face difficulties attracting retailers.

“Retailers are holding back their expansion plans even though some of them may not be affected severely,” he said.

On office space, Henry Butcher Malaysia (Penang) director Dr Teoh Poh Huat said the present occupancy rate of about 75.5% for a total office space of around one million sq m was about the same as last year. “There is an overhang of 258,112 sq m,” he said, adding that the occupancy rate in 2007 was 74.4%.

Teoh said the rental rates for office space had remained flat since last year, ranging from RM2 to RM3.50 psf.

“According to a Henry Butcher survey, office rental rates in the country are expected to drop amid an economic slowdown. It is hard to quantify the decline, as there are still many tenants whose tenancies won’t expire for another two to three years,” he said.

“For those tenants whose tenancies are going to expire, the rental rates they get depend on their bargaining strength.

“It is now a tenant’s market. Landlords are ready to offer more concessions on rentals to blue-chip tenants.”

Teoh said there was no significant supply of new office space expected in the market.

“Most of the offices in the traditional financial district of George Town are old except for Wisma Great Eastern in Lebuh Light, which is about 60,000 sq ft.

“The occupancy rate for Wisma Great Eastern is about 80%. The rental for ground floor is RM4.30 psf, while the rental for the upper floor ranged from RM2.30 to RM2.80, depending on the units sea-view,” he said.

Teoh said the trend in demand nowadays was towards offices with layout plans that maximised space usage.

“Newer and better design office suites with fewer columns and greater space layout can help a company save on operation costs,” he said.

Meanwhile, C.A. Lim & Co proprietor Lim Chien Aun said the overhang of office space in Penang was partially caused by competition from buildings in non-commercial zones.

“Such buildings include pre-war and post-war houses that are converted for commercial use. These properties, with easy accessibility and main road frontage, tend to snatch potential clients of office buildings,” he said.

“Further more, such pre-war and post-war houses do not have maintenance and service charges.”

As for retail space, Lim said the current trend was for retail properties to be located away from George Town, where there was a strong catchment of population in areas such as Bayan Baru, Air Itam and Pulau Tikus.

By The Star (by David Tan)

The CEO much in demand

The office units of Ideal Home Properties Sdn Bhd’s RM110mil The CEO in Penang has appreciated by about 20% since the launch in late 2007.

“Due to consistent demand, those who purchased the units in The CEO will find the value of their properties has appreciated by some 20% since they signed the sale and purchase agreement with us,” Ideal Homes business development manager Adrian Tan told StarBiz.

An office unit in The CEO with a 500 sq ft built-up area is now selling for about RM98,000, while a 2,500-sq-ft unit is now priced at RM750,000, representing a 20% increase from the original selling price.

The CEO, the latest modern office building on the island, is 70% sold. The project is scheduled for completion in late 2009 and is expected to obtain the certificate of fitness in the first quarter of 2010.

Tan said that there was still demand for modern office building space.

“While there may be a general overhang of office space on the island, there is however a shortage of modern office building space equipped with broadband IT and other modern facilities, especially in the Bayan Baru vicinity, where The CEO is located.

“This is what we learnt when we conducted the feasibility study for The CEO two years ago before launching the project,” Tan said, adding that The CEO office units were likely to fetch between RM2 and RM2.50 per sq ft in rentals upon completion.

The building provides some 350,000 sq ft of gross commercial area and over 400 office units.

“The building has a specially-designed level to accommodate facilities such as a gymnasium, pool, restaurant and meeting rooms,” Tan said.

By The Star

Major construction projects awaiting government decision

THERE is urgency for a heightened pace of construction works flowing to keep at least one economic component pumping hard. With a new Cabinet line-up and by-elections (almost) out-of-the-way, we anticipate a refocus on development priorities.

Of the RM7bil first fiscal stimulus unveiled in November, only RM2.4bil worth of projects was awarded as at April 17.

Of this, RM350mil has been spent; the balance is still “work-in-progress”.

Plans are for a total RM5.2bil worth of projects to be awarded by June, and a full roll-out of RM7bil (38,000 projects) by August.

As for the RM60bil mini-Budget unveiled in March, RM15bil is fiscal allocation (RM10bil development, RM5bil operating), direct from the government’s coffers.

Of the RM7bil first fiscal stimulus, we estimate the construction component to be RM4.6bil.

The RM60bil mini-Budget offers RM11bil worth of works; the largest being the RM2bil LCCT, KLIA.

The 9MP, too, is not forgotten.

Of the RM230bil 9MP allocation for development for 2006-2010, only RM119bil has been spent as at end-2008, implying a potential RM111bil spending over 2009-2010 assuming the RM230bil is maintained.

For 2009, government’s gross development spending was projected at RM56.7bil (2008: RM42.8bil) before imputing the stimulus allocations.

Including the second fiscal stimulus package, this would reach RM60bil in 2010.

We expect a heightened pace of construction tenders and awards from mid-2009.

Major projects awaiting decisions are the Pahang-Selangor water transfer and Klang Valley LRT system.

The government has clearly no problem in fund raising, without the distraction of a banking crisis, as in 1998.

Year-to-date, RM30.5bil worth of MGS-GIS has been issued, out of a total RM95bil estimated for 2009.

Of the RM95bil, RM42bil is for refinancing while the balance RM53bil is new financing.

The RM30.5bil issued is already more than half of the official projected budget deficit of RM53.8bil for 2009.

This should be sufficient for the immediate roll-out of construction packages.

More focus on east Malaysia

Higher allocations under the 9MP and second fiscal stimulus, and the new Cabinet line-up imply “urgency” for more infrastructure development in Sabah and Sarawak.

Of the RM10bil development allocation under the RM60bil mini-Budget, Sarawak has the highest allocation of RM1.2bil while Sabah’s allocation was the sixth largest.

Sarawak Corridor of Renewable Energy (Score) and Sabah Development Corridor remain very relevant and we expect more construction works in Sabah and Sarawak.

We expect more positive news flow benefiting construction by mid-2009, with more mid-sized contracts of less than RM500mil each to lead the momentum for construction.

Top on the list of potential beneficiaries are contractors with long experience, excellent delivery track records and strong balance sheets to carry the weight of a turnkey contractor.

Our top picks for contractors of mid-sized projects are WCT and IJM Corp, which we upgraded to “buy” last week.

Increasing momentum of works at Sarawak should benefit home-grown contractors like Hock Seng Lee (HSL) and Naim Cendera.

We expect HSL, (outstanding order book of RM1.27bil), to record strong earnings growth in 2009 (+>20% year-on-year), while further job wins should sustain earnings into 2010.

We upgrade HSL to a “buy”.

We also expect Loh & Loh to gain from water- and energy-related works under Score.

WCT and IJM Corp, which have built up good track records, could benefit in Sabah.

Gamuda remains known for its construction ability in mega projects – SSP3 in 1999 and SMART in 2002 - and we think Gamuda may play a lead role in the Klang Valley LRT works.

However, it is a little early to review our “hold” call on the stock.

Our TP is raised after removing a 20% discount to our unchanged RNAV of RM2.50/sh.

By The Star

Sarawak emerges as a powerhouse

The long-unsettled Bakun hydro-electric dam project, for undersea transmission of electricity to the peninsula or be grid-guided within Sabah and Sarawak only, was recently decided on by the newly formed Cabinet.

Electricity will be transmitted to the peninsula from Bakun in Sarawak through cables on the sea bed as well as to Sabah, according to Energy, Green Technology and Water Minister Peter Chin Fah Kui.

The project will create considerable construction activity in Sarawak. While civil works are ongoing in the dam area, the upcoming submarine cable project is estimated to cost about RM9bil.

In a report last week, OSK Research noted that the decision meant the land-based transmission network would also proceed, a RM3bil project for which Malaysian Resources Corp Bhd (MRCB) could be a leading contender. The group is reputedly one of two major power transmission players in the country.

It is noted that MRCB is forecast to be valued at a price/earnings ratio of 160 times this year’s estimated earnings and 63 times next year’s at its share price of RM1.03. That also valued the group, which is developing Kuala Lumpur Sentral, at a price-to-book ratio of 1.5 times.

The Bakun undersea transmission project also revives the prospects for Leader Universal Holdings Bhd’s joint-venture company, UCS Holdings Sdn Bhd.

Leader said in December that it had exchanged its shares in Universal Cable (Sarawak) Sdn Bhd for shares in UCS which is being prepared for an initial public offering.

UCS’ principal business is in the manufacture of electrical wires and cables and the sub-contract of power and transmission-related works. It is believed that UCS was set up with the Bakun transmission project as its objective.

While the ongoing Bakun project is a boost for construction activity in Sarawak, it is expected that there will be a lot more works in the coming months.

In the past couple of months, at least three local brokerages reported they expected an acceleration in the award of construction jobs as the Government seeks to offset the current weakness in other sectors.

In a report last week, Maybank Investment Bank said it expected “a synchronised upturn” of fiscal stimulus programmes and Ninth Malaysia Plan spending. The funds are now available as RM30bil of Malaysian Government Securities have been issued to date.

Maybank Investment Bank also observed that among the states, Sarawak had the largest allocation under the second fiscal stimulus. Political analysts noted that Sabah and Sarawak had become politically important states.

The rollout of projects in these two states will provide opportunities for home-grown contractors such as Cahya Mata Sarawak Bhd, Naim Holdings Bhd and Hock Seng Lee Bhd. They have an advantage in being more familiar with the local landscape and people.

HLG Research said in a report that they would benefit from higher funding allocation and restricted tender policies adopted by these states.

Notwithstanding that, it is noted that contractors based in the peninsula have also been able to secure sizeable jobs in Sabah and Sarawak, and these players include WCT Bhd, Muhibbah Engineering Bhd and TRC Synergy Bhd.

Construction is a constantly cyclical industry as the weak domestic sector showed in recent years. Over the next two years, however, this will be a busy period for contractors in their home market.

By The Star (by C.S Tan)