Reversal of liquidity and rising bond yields still the key risks

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Real estate sector

Maintain neutral:

Bank Negara Malaysia (BNM) has introduced a set of new rules to govern rising household debt, which stands at 83% of GDP. Loan tenure is now limited to 35 years with immediate effect for residential and non-residential property financing. The impact on the property sector is minimal. While the increase in monthly instalments for borrowers is 6%, the affordability for housing is lowered by a mere 2%. Unofficially, the banks could be more stringent in loan approvals going forward, as it was also indicated that the debt service ratio of the “vulnerable group" should not exceed 60%.

The reversal of liquidity and rising bond yields are threats to the property sector. Foreign exchange reserves have retreated by US$4.7 billion (RM15 billion) in the second half of June after falling by US$600 million in the first half of the month. The excess liquidity mopped up by BNM has also fallen by about 3% from RM290.9 billion in mid-June. While the unwinding of liquidity is expected to slow down foreign buying of properties, the potential resultant volatility in the equity markets could dampen the high-beta property sector, especially when the sector has outperformed the market in the first half of the year.

The US, Hong Kong, Singapore and some other countries have seen mortgage rates rising by 25 to 50 basis points. To be in line with overseas markets, local banks could follow suit in order to price in the higher interest rate risk as a result of rising bond yields and tightened liquidity. Higher borrowing cost is typically not favourable to the property sector, as slower demand will dampen property price growth.

Despite our cautious stance, IJM Land Bhd, Sunway Bhd and Tambun Indah Land Bhd are still the quality names. A short-term relief rally due to the insignificant impact from the policy measures would be a good time for investors to reduce exposure to some stocks with higher risks. Historically, the uptrends in the KL Property Index typically last for only two quarters, and it has already outperformed since February this year. — RHB Research, July 8

This article first appeared in The Edge Financial Daily, on July 9, 2013.

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