BY AFIQ ISA

A major concern was the escalating oversupply situation in both the residential and commercial space, while at the same time, sellers were struggling to secure sales due to the prevailing weak economic environment.

PETALING JAYA: The prospect of prolonged headwinds in the property sector has prompted a research house to revise its rating for three companies, advising investors to trim their exposure following the recent strong rally in equities.

In a series of reports, RHB Research revised its rating on IOI Properties Group Bhd (IOI Prop) to “neutral” from a “trading buy” previously. Similarly, UOA Development Bhd’s stock rating was revised downwards to “neutral” from a “buy”, while UEM Sunrise Group Bhd now carries a “sell” rating from “neutral” previously.

In explaining its rationale for the revisions, RHB cited a multitude of headwinds being faced by companies in the property sector.

A major concern was the escalating oversupply situation in both the residential and commercial space, while at the same time, sellers were struggling to secure sales due to the prevailing weak economic environment, it said.

“The key underpinning factors in the sector – macroeconomic outlook, demand and supply dynamics and the prospect of job security – are not encouraging.

“We expect the sector to recover only in 2017, underpinned by the uptick in the population cycle as well as a better sector outlook after the oversupply units are largely absorbed,” it said.

It is worth noting that UEM Sunrise and IOI Prop are primarily known for developing residential townships, while UOA’s projects typically comprise of high-rise developments.

According to RHB, IOI Prop has a fair value of RM2.38, while UEM Sunrise and UOA have a fair value of 95 sen and RM2.08, repectively. It has a “neutral” rating on the property sector as a whole.

RHB expects the impact from any policy easing to have a short-lived impact, given the weak market fundamentals and the low buying appetite of prospective home owners.

The weakness was indicated by aggregate new sales last year, which fell 28% year-on-year. This was a continuation of the sluggish demand seen in 2014 when sales fell by 26%.

Despite the introduction of new schemes to spur more property purchases, developers continue to face sluggish sales while economic conditions remain weak.

Additionally, inflationary pressures and high household debt leverage could mean that demand would stay low for the foreseeable future, RHB explained.

On the other hand, there may be a silver lining for property developers this year despite the sentiment issues.

In another note, AllianceDBS Research said mass-market products at strategic locations would continue to enjoy healthy sales.

“While there is no property bubble for now, we do fear an oversupply of office space in Kuala Lumpur, hybrid high-rise units and high-end condos in Iskandar Malaysia,” it said, adding that players in affordable housing and landed properties were its top picks for the sector due to strong demand.