KUALA LUMPUR: Listed property companies have seen their shares rallied especially in July but the momentum may not be extended in the near term.
Bursa Malaysia's KL Property Index has rallied by more than 30 per cent so far this year, with a sudden surge in July pushing its performance ahead of the benchmark FBM KLCI in the first seven months of 2023.
With the current unstable economic climate, there are several factors that have been the catalyst of the surge.
Cheap valuation is among the main tailwinds.
"Prior to the rally in July, Bursa Malaysia's KL Property Index was trading at a multi-year low P/B (price to book) multiple of only 0.4x versus historical average of 0.6x," Tradeview Capital Sdn Bhd vice president Tan Cheng Wen told the New Straits Times.
Apart from that, several property developers have reported solid earnings particularly during the second quarter of 2023 (2Q23).
Most importantly, the positive investor sentiment has buoyed the index further upward, especially over infrastructure and measures which were implemented by the government.
This includes Penang LRT, KL MRT3, Kuala Lumpur-Singapore high speed rail (KL-Singapore HSR) and the Special Finance Zone in Country Garden.
Nonetheless, KL Property Index is expected to slow down. Factors that may bog down the sector's development include oversupply, high household debts as well as the softening of economic growth.
"As such, we prefer players who potentially have more upside - These players focus on landed residential, industrial, and logistics real estate that are seeing a more favourable supply-demand dynamics," Tan said.
Echoing the sentiment, Rakuten Trade Sdn Bhd equity research vice president Thong Pak Leng said despite the sudden rally in July, the property market still has not recovered fully.
"But valuations of property stocks are cheap and the price to book value is around 0.5x," he said.
Rakuten named Mah Sing Group Bhd and SkyWorld Development Bhd as the top picks within the property sector.
Areca Capital chief executive officer Danny Wong said the property sector has long been sidelined by investors.
This is mainly due to rising input costs as well as restrictive banks' lending and high borrowing costs for both developers and buyers.
"With an indicative pause of interest rates hike and deep valuation discount, these trigger bargain hunting. Due to the low base effect, it presented a good run for the past two months," Wong said.
Still, the sector valuation remains undemanding.
"Sector outlook depends on interest rates and overall market risk profile," he said.
Malacca Securities Sdn Bhd head of research Loui Low said the uptick in property index is a continuation of the uptrend move after a brief profit-taking activities previously.
Properties under Iskandar Malaysia, Johor's property market as well as the fresh proposal on the Kuala Lumpur-Singapore high speed rail are the catalysts supporting the sector, Low added.