Developers will start new projects, albeit with caution due to possible interest rate hikes

Local real estate developers are beginning new projects this year, but with caution due to growing building material costs, interest rate hikes, and a prolonged labour supply shortage.

Maybank Investment Bank (Maybank IB) said that developers under its coverage expect flat or lower property sales in the fiscal year 2023 (FY23), ranging from a 38 per cent reduction to a 2.2 per cent increase.

Sime Darby Property Bhd and Tambun Indah Land Bhd intend to hold down their debuts in 2023 to avoid greater construction costs and possible delays in 'product' delivery, according to analyst Wong Wei Sum.

Developers with solid balance sheets, like Eco World Development Group Bhd, are aiming to replenish their landbank (200 to 400 acres) for industrial development projects this year, she said, after their industrial property sales increased by 1.5x year on year (YoY) to RM753 million in FY22.

Sime Darby Property has also proposed acquiring 949 acres of agricultural land from Sime Darby Plantation Bhd in early December 2022 for RM618 million or RM15 per square foot, to be turned into an industrial park.

Industrial product sales of RM907 million accounted for 25 per cent of Sime Darby Property's total sales in FY22 (FY21: RM532.5 million or 18 per cent of total sales).

SP Setia Bhd is also in the process of transforming two plots of property totaling around 400 acres in Klang and 321 acres of agricultural land near the Port of Tanjung Pelepas in Johor into industrial projects.

"We were told that its (SP Setia) upcoming Setia Alaman industrial park in Klang has received overwhelming responses even before its launch," Wong said in a note.

She said that increased demand for industrial property developments in Malaysia has gained traction, particularly after the reopening of international borders in April 2022, and that they will remain popular.

"Klang Valley remains the key property market in Malaysia. Besides, we also like Batu Kawan on Penang mainland, which is benefitting from rising industrial activities there," she said.

Meanwhile, Wong said that 71 per cent of the local developers covered by Maybank IB (those with fiscal years ending December 31) had mixed property sales performance in 2022.

The delay in launching three new projects in the Klang Valley and Melbourne, Australia hampered UEM Sunrise's sales. The company has set a higher FY23 sales target of RM1.5 billion (FY22: RM924 million), primarily driven by the en bloc sale of RM900 million for its Melbourne project planned for the year.

Sunway Bhd also plans to increase property sales by 15 per cent YoY in FY23, owing mostly to its developments in Singapore.

Maybank IB forecasts greater sales from most developers in the second half of (2H23), according to Wong, pending additional clarity in the economic direction.

"Rising construction material costs and labour shortages are issues that continue to haunt the property sector. Developers are now adopting a wait-and-see approach and will launch properties more aggressively in 2H23," she said.

Of the five developers (SP Setia, Sime Darby Property, Tambun Indah, Sunway, and UEM Sunrise) that reported a net profit, two were in line with the firm's expectations (SP Setia, Tambun Indah, and two (Sime Darby Property and Sunway) were above.

"UEM Sunrise's core profit was below our expectation on higher-than-expected tax charges," she said.

SFZ in Johor to attract FDIs?

In Johor, the government indicated in the re-tabled Budget 2023 its goal to strengthen Iskandar Malaysia's growth through the construction of a Special Financial Zone (SFZ), as well as to offer attractive and competitive packages to attract global investors and talents.

According to Wong, a successful SFZ may boost commerce and foreign investment while also creating additional job possibilities in Iskandar Malaysia.

As a result, expanding population should increase demand for homes in Iskandar Malaysia, reducing unsold stocks, particularly in the highrise residential segment.

"Nevertheless, more work needs to be done to boost property demand in Iskandar Malaysia, especially after a stricter Malaysia My Second Home (MM2H) programme in 2021. Competition in the property market is growing including from Singapore which is also eyeing the foreign buyers' segment. We are NEUTRAL on the proposed SFZ for now pending further information.

The SFZ development may potentially benefit developers with exposures in Iskandar Malaysia such as UEM Sunrise, Eco World, Sunway, and Iskandar Waterfront City Bhd.

Posted on: 14th March 2023

Source: New Straits Times