RHB Investment Bank Bhd is apprehensive about developers' earnings prospects this year, given the consistently high construction costs resulting from the surge in primary commodities such as crude oil, steel bar, copper, and aluminium.
In a note yesterday, the investment bank said the resulting price hikes in cement, sand, tiles and related products collectively contributed to the surge in total building expenses.
"Major commodity prices saw significant price hikes, exacerbated by the Russia-Ukraine crisis in March. These include crude oil, steel bar, copper and aluminium, which are the key components in building materials.
"Assuming the uptrend in commodity prices persists over the next six to nine months, besides margin compression, we think developers will tend to be more prudent with their launches.
"Developers will likely resize/re-design and maintain the selling prices and affordability of their products, or look for alternative construction materials that are cheaper to mitigate cost pressure," it said.
According to the recent survey by the Real Estate and Housing Developers' Association Malaysia, property developers generally expect construction costs to surge by an average of 19 per cent this year, due to the rise in building material prices, wages and financing costs.
The survey results also indicated that the average percentage increase in the price of building materials such as aluminium is at 55 per cent, timber at 52 per cent, steel at 38 per cent, cement at 19 per cent, sand at 18 per cent, and concrete at 16 per cent.
Transportation and logistics costs are also important factors.
RHB Investment Bank said that developers have generally set a reduced sales objective this year (about -10 per cent year-on-year) after robust property sales in 2021.
Despite the rolling lockdowns from June to August, total property sales in 2021 increased by about 40 per cent yearly, partially boosted by the Home Ownership Campaign (HOC).
A few developers outperformed their sales projections. S P Setia, Sime Darby Property, Sunway, and Tambun Indah were among them.
"In our view, 2022's more conservative sales targets are probably due to the absence of the Home Ownership Campaign, expectations for an interest rate hike in the second half of 2022, and rising inflationary pressure," it said.
The investment bank said that rising inflationary pressure might potentially dampen household disposable income on the macroeconomic front.
"Given the market has just recovered from last year's lockdown, demand for property may be negatively affected as property is deemed a big-ticket item that is considered non-discretionary. We believe the timing of election and expectation of election results may swing sentiment," it said.
The investment bank believes that reopening the economy and international boundaries will also assist the property sector.
Potential trading opportunities,given undemanding valuations
RHB Investment Bank opined that property stocks might offer short-term trading possibilities, given the sector is currently selling at a 64 per cent discount to RNAV, which has remained essentially stable since the end of 2021.
It said that recent news flow on the construction sector such as the takeover of highways in Klang Valley and the green light for the Mass Rapid Transit 3 (MRT3) may potentially have a positive spillover on the sector.
"Although the property sector is not a direct beneficiary, and MRT 3 is not a new project (the three lines were first announced in 2010/2011), we think sentiment on the property sector may improve over the near term, while the sector's cheap valuation is a good reason for investors to enter, especially those with a shorter investment horizon