Maintain Overweight. We expect interest on property stocks to sustain at higher levels in 2011 due to:
(i) strong pro-property measures by the government under the Economic Transformation Programme (ETP) comprising government land developments and major infrastructure spending under the Greater Kuala Lumpur (KL) initiative, and
(ii) another round of consolidation of property players to create the size for larger domestic participation and overseas expansion. Pro-property measures by the government. We expect three out of ten government land developments to kick-start in 2011 of which two are located in Greater KL: Sg Buloh and KL Int’l Financial District. We expect the developments to be awarded through tender.
Besides UEML-Sunrise, we expect S P Setia, Mah Sing, Glomac and Bolton to be the beneficiaries. The Greater KL LRT extension and MRT networks will improve accessibility and connectivity, which will be positive for demand and support a gradual rise in property prices. Major projects along the alignments include S P Setia’s KL Eco City, SunCity’s
Velocity, and the upcoming government land development projects.
Another round of consolidation? A merger increases:
(i) land bank and balance sheet sizes, and
(ii) market capitalisation, which will in turn improve shares trading liquidity and potentially free float. After two mega-mergers within a month (in Nov 2010, ex-MRCB-IJML which was aborted on 30 Dec), we expect S P Setia to be next on the bandwagon involving PNB group of companies. This is most likely in the form of prime land injections by its major shareholder, PNB (31% stake). We also see potential consolidation among smaller cap developers like Guocoland, E&O, Country Heights and MK Land.
Risks in commercial properties. While there are positives to support long-term demand – young demographic, affordability and continuous incentives by the government to attract high-income foreigners – the development of government land within the KL central business district (CBD) without a coordinated approach will create oversupply in the commercial property segment.
This will negatively impact rental rates and rises occupancy risk. We are cautious on the office REIT segment – those focused in the CBD, e.g. Tower REIT and UOA REIT.
S P Setia is our top pick to benefit from government land developments and MRT connectivity (its RM6b KL Eco City), followed by Mah Sing (mid cap) and Glomac (small cap). We are upbeat on UEML-Sunrise, which may gain from Khazanah-Temasek’s Singapore land development.
Compared to other government land developments, we believe the prime Singapore land will take a shorter time to complete and lower upfront infrastructure costs.
Government land development the key driver
Kick-starting government land developments. We expect three out of ten parcels of government land developments to start in 2H11. They are:
(i) 2,680 acres Malaysian Rubber Board (MRB) land in Sg Buloh,
(ii) 84 acres KL International Financial District (KLIFD), and
(iii) 5.3 ha in Singapore’s Marina South and Ophir Rochor from Keretapi Tanah Melayu’s (KTMB) land swap agreement. These projects are worth more than RM57b in total and we expect them to be parceled out, and awarded through tender.
Crown jewels: Sg Buloh and Singapore land. We are particularly excited about the development of:
(i) the RM10b Sg Buloh MRB land given continuous strong demand on residential properties and spillover effects from the growing Kota Damansara township, and
(ii) RM21b Marina South and Ophir-Rochor developments which enable Malaysian developers to tap onto the booming Singapore property market. Also, we see lower execution risks for these two projects due to strong backups by:
(i) EPF for the Sg Buloh development, and
(ii) Malaysia and Singapore governments for the Singapore land under Khazanah (60%) and Temasek (40%) JV. Temasek owns and manages the Singapore Government’s direct investments, both locally and overseas.
Likely winners. GLCs will most likely be the front runners for a developer role in the government land developments. There is a good chance that these listed GLCs will secure the larger and more strategic parcels:
(i) EPF’s 42%-owned MRCB in the MRB Sg Buloh and Cochrane developments, and
(ii) Khazanah’s 56-65%-owned UEMLSunrise (post-merger) in the Marina South and Ophir-Rochor developments.
However, we believe other developers with strong track record and political links like S P Setia (Buy; RM6.90 TP), Mah Sing (Buy; RM2.60 TP), Glomac (Buy; RM2.15 TP) and Bolton (Not Rated) also stand a good chance in securing the bids to develop some of these land, especially the larger tract MRB Sg Buloh (2,680 acres).
As for the 378 acres Kampung Baru redevelopment project (e.RM20b GDV), we see better chances for bumi-developers like Glomac to be involved in the Malay Reserve land tract. Glomac has strong political ties and a good delivery track record in commercial developments in the city centre. This is reflected in its few asset sales to government agencies in 2009: Wisma Glomac 3 in Kompleks Kelana Centre Point to PNB for RM50m (Feb ’09), Glomac Business Centre Block B to Koperasi Kakitangan Bank Rakyat Bhd for RM22.6m (Aug ’09), and a 25-storey office tower to Lembaga Tabung Haji for RM171m (Nov ’09).
Risks in commercial properties. Our concerns remain on the excessive supply of commercial spaces, especially office properties when massive developments come on-stream. For example, Warisan Merdeka by PNB will offer about 2.2m sq.ft. NLA by 2015. This is on top of 11.6m sq ft of new office supply coming on-stream by 2012 (source: Knight Frank) versus the current 43.2m sq ft in KL CBD. The huge office supply will be negative on rental rates and leads to occupancy risks.
Greater KL’s new connectivity support
MRT and LRT extension positive for property prices. The RM36b MRT project will support massive government land developments in the Klang Valley by connecting the northwest and southeast of the Klang Valley. It will have a significant positive impact on properties prices. Better connectivity and accessibility will raise the surrounding land value as well as the marketability of new property projects. This gives a better pricing power (and hence higher GDV) and lowers take-up risks. As more information is disseminated by the government on the location of the MRT and LRT station placeholders, we expect a surge in property prices for locations in the respective vicinities.
Likely beneficiaries. We are therefore bullish on several soon-to belaunched/ ongoing property developments that will benefit from the MRT connectivity such as:
(i) S P Setia’s RM6b KL Eco City,
RM5b Sunway Velocity,
(iii) Mah Sing’s M Suites, M City and Icon Mont
(iv) government land developments like Sg Buloh, Sg Besi airport, MATRADE, Warisan Merdeka and KLIFD (see map below). Our discussions with S P Setia indicate that response for the integrated transportation hub concept type of project under KL Eco City has been overwhelming even before its official launch in Jan-Feb 2011; S P Setia is close to sealing a few office enbloc sales worth RM1b. KL Eco City’s GDV may be enhanced further by the MRT connectivity. A 10% rise in the e.RM6b GDV raises RNAV estimate by 2 sen per S P Setia share.
High Speed Rail (HSR): Catalyst for Penang property market too. Major infrastructure plans under the government’s ETP includes the HSR, connecting Singapore to Kuala Lumpur and probably all the wayup to Penang (possibly alongside the existing KTM track). We believe properties in both KL and Penang would benefit tremendously from greater demand from Singaporeans and foreigners who will be drawn to the relatively cheaper property prices in Malaysia, and supported by the vastly improved connectivity offered by the HSR. This could even help solve part of the condominium oversupply in Kuala Lumpur.
Potential beneficiaries from this new connectivity, include:
1) highrise/ high-end properties around the Mont Kiara and KLCC areas,
2) government land developments in the Klang Valley, and
3) high-end properties in Penang island like IJM Land’s The Light, E&O’s Seri Tanjung Penang, S P Setia’s Brook Residences, Mah Sing’s Ferringhi Residence and Hunza Properties’ Gurney Paragon.
Another round of consolidation?
M&A, preparing for mega-government developments. Apart from being more investable (larger market cap) and liquid, we view the recent mega-merger in the property sector – UEML-Sunrise – as part of the GLCs’ preparation in bidding for the development of government land. A sizeable balance sheet, track record and expertise in a broad
range of development products, including township, high-rise and commercial projects, will strengthen the bidder's resume when pursuing government land privatisation.
For instance, in the UEML-Sunrise merger, UEML can leverage on Sunrise’s strong brand name and expertise in high-rise residential and commercial developments. This will enhance its chances when bidding for the development of Marina South and Ophir-Rochor projects in Singapore. Note that our RM21b GDV estimate is based on a blended SGD2,021 psf selling price on 5.4m sq.ft. of GFA projected by the consultants after adjusting for an 80% efficiency ratio. This is on top of strong back-up by UEML’s major shareholder, Khazanah (77% stake) who part owns the project together with Singapore’s Temasek.
The next in consolidation? We expect S P Setia to be next, involving PNB group of companies, most likely in the form of direct land injections by PNB. The land injection could come from PNB’s existing land bank held under privatised companies, Pelangi, Petaling Garden and Island & Peninsular, and Sime Property (under 48%-owned Sime Darby). These companies have c. 103,096 acres of land bank in total vs. S P Setia’s 3,294 acres. The potential GDV size is at least RM67b vs. S P Setia’s existing RM36.6b.
We could also see potential consolidation among small cap developers like Guocoland, E&O, Country Heights and MK Land. MK Land has recently indicated its intention of merging with another developer, whilst E&O is believed to be for sale. We believe the merger / sale would only happen after E&O commences the Seri Tanjung Pinang phase 2 land
reclamation (740 acres) before its rights for the land reclamation expire in 2019. Both Country Heights and MK Land are trading at 0.3x and 0.5x P/NTA at current share prices of RM0.77 and RM0.40 respectively – hence, they are attractive acquisition targets.