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Friday, January 6, 2012

Analysts see REITs as defensive buys on uncertain outlook

PETALING JAYA: Research analysts have mixed views on the stocks of property developers, with some saying that the oversold shares are due for a rebound while others are quite negative on the sector.

Some analysts also recommended real estate investment trusts (REITs) as defensive plays, given the uncertain outlook for growth in property development.

RHB Research Institute upgraded the property sector to “neutral” as it believed that the current valuations of property stocks had largely reflected the sector's negative factors.

CIMB Research, which downgraded the sector from “overweight” to “trading buy”, said property stocks should at least enjoy a rebound as they were oversold.

OSK Research maintained a “neutral” call on the sector, and said while global economic uncertainties might dampen property buying sentiment, the low interest rate environment and flush liquidity in the banking system would continue to shore up demand.

However, Kenanga Research was quite bearish on the property development sector, and maintained its “underweight” rating on property developers.

Kenanga Research expected property demand and capital values in 2012 to moderate to a 5% year-on-year in transactions value growth, due to recent government cooling measures, buying caution in light of global economic uncertainties as well as a “breather” after two consecutive years of record demand.

RHB Research said the outlook for the property sector remained challenging and fundamentals were still “wobbly”, as property sales were largely driven by gross domestic product (GDP) growth.

“Given our GDP growth forecast of 3.6% for 2012, we expect property sales to slow to 5% after a 20% growth in 2011 (annualised),” said RHB Research.

Kenanga Research opined that the medium to large-sized property developers such as UEM Land Holdings Bhd, SP Setia Bhd, Mah Sing Group Bhd and UOA Development Bhd were overly bullish in their 20% to 60% year-on-year sales growth targets this year.

There are signs that financial institutions are more cautious in lending to real estate buyers nowadays.

“This is evident with slower monthly mortgage approvals. There is a higher frequency of rebates' offered by developers, while some have reported that buyers are taking longer to commit to purchases.”

However, CIMB Research noted that the recent performance of property companies' share prices had diverged from the real property sector's achievement in terms of sales and profits.

“SP Setia, Mah Sing, UEM Land, UOA Development and Eastern & Oriental Bhd all locked in record sales (in 2011).”

The research unit said that fundamentally, property companies should continue to do well in 2012.

Key headwinds including slowing GDP growth (potentially from 5% in 2011 to 3.8% in 2012) should be more than offset by cheap (stock) valuations, continued record new sales and robust earnings growth.

OSK Research also pointed out that the downside risk for property prices should be mitigated by lack of equivalent investment options, as property investments offered an attractive hedge against inflation.

According to CIMB Research, there is a robust outlook for the residential market despite strong price gains in the past two years.

It was noted that the growth of residential property supply throughout Malaysia had declined over the past 10 years.

The increase in residential property supply in 2010 was among the lowest ever, which had contributed to the strong appreciation in prices over the past two to three years.

CIMB Research said with the drive to transform Greater Kuala Lumpur into an outstanding capital city, the population was forecaste to rise from six million currently to 10 million by 2020.

“It is estimated that one million homes would have to be constructed to meet the requirements of an enlarged population base,” it said.

OSK Research concurred, and said the residential market was expected to remain rather encouraging in 2012, although some developers might become more cautious on the outlook for high-end landed and high-rise residential units.

“We expect developers to shift to the more affordable mass-market housing segment to tap the high demand by first-time and young buyers,” said OSK Research.

Kenanga Research also said affordability would be the theme amidst signs of slowing property demand growth.

“We expect developers under our coverage to source for more mass-housing landbanks but sales and earnings contributions would take another one to two years.”

However, the outlook in the commercial sector is weak.

CIMB Research noted that the glut of office space in the Klang Valley would worsen as more supply cam onstream in the coming years, with flattish rentals as occupancy rates continued to fall.

“Retail space is the only bright spot but even then, the market is polarised, with leading malls still doing well and most of the others languishing,” it said, adding that the huge impending supply of office space over the next few years would continue exerting downward pressure on rental rates.

, with landlords who were recording occupancy rates of below 50% expected to lower rental rates.

Meanwhile, Kenanga Research is maintaining its “overweight” rating on Malaysian REITs, which are likely to hunt for acquisition opportunities in 2012 as the office and retail sector may face weaknesses in capital values because of incoming oversupply.

It noted that Pavilion REIT had done well with a 17% share price appreciation since its recent listing.

Kenanga Research has “outperform” calls on CapitaMalls Malaysia Trust and Axis REIT, with target prices of RM1.57 and RM2.78 respectively.

RHB Research also said it remained positive on retail REITs.

By The Star

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