Debunking the Property Bubble 2012

March 5, 2012

REGION AL

PROPERTY DEVT & INVT

MALAYSIA

SHORT TERM (3 MTH)

LONG TERM

SINGAPORE INDONESIA THAILAND

Conviction

CHINA, HONG KONG

Notes from the Field

Debunking the property bubble myth Talk of a property bubble is overstated as the sharp rise in residential property prices over the past few years is confined to selected areas.

Affordability is near its all-time high and prices have to surge 50-100% before affordability falls to pre-Asian financial crisis levels.

Terence Wong CFA T (60) 3 20849689 E terence.wong@cimb.com

Figure 1: Affordability index (average household income/ mortgage payment) 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50

20 10

20 08

20 06

20 04

20 02

20 00

19 98

19 96

19 94

19 92

19 90

19 88

19 86

19 84

19 82

0.00

19 80

“Even though 59% of Malaysian respondents believed there was a property bubble in Malaysia, 62% were still keen to purchase a property within the next six to 12 months.

Malaysian’s love affair with properties continues.”

SOURCES: CIMB, PMR, DOS, BNM, MOF

─

Shaun Di Gregorio, iProperty Group CEO

Highlighted Companies Eastern & Oriental E&O is the most leveraged to rising residential prices as its GDV-to-market cap ratio is the highest, at over 20x. This is because we estimate a GDV of RM33bn for Phase 2 of Seri Tanjung Pinang in Penang.

Mah Sing Group Mah Sing remains our top pick in the property sector for its attractive valuations, strong earnings growth and good sales track record. The group’s target of an 11% rise in new sales to RM2.5bn in 2012 is conservative.

SP Setia SP Setia is a key beneficiary of rising residential prices due to its large landbank and high GDV of RM60bn. The group bought landbank with RM22bn GDV potential in 2011 and is looking to sell RM4bn worth of properties in 2012, up 22%.

Our analysis of the demand-supply, income and price dynamics of residential properties reaffirm our bullish view. We maintain our Trading Buy on the sector and keep Mah Sing as our top pick.

Up too much too soon?

While we agree that there is some froth in selected property products in certain locations, we believe that talk of a bubble and an imminent collapse in prices is exaggerated. For one, the affordability index is near its all-time high as interest rates have fallen by more than half and residential prices have lagged behind household incomes for many years after the 1997/8 Asian financial crisis.

Moreover, oversupply has led to sharp price falls in the key KLCC and Mont’ Kiara condo markets over the past few years. This is certainly not bubble conditions.

Prices should be higher In fact, we are surprised that residential prices have not risen at a faster pace as new supply has fallen significantly over the past few years.

Annual supply growth of residential property in Malaysia and even the Klang Valley fell from 12-13% in 2001 to only 2-3% in 2010. We estimate a shortage of close to 2m proper homes (made of brick).

Risks to our analysis Critical to continued relevance of our affordability analysis are the assumptions that interest rates do not return to the 1980s/90s highs and banks’ net interest margins remain competitive. Also, our analysis does not factor in changes in consumers’ spending habits and relatively high debt, which could in part be due to funds freed up by near-peak residential affordability.

IMPORTANT DISCLOSURES. INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. Designed by Eight, Powered by EFA

PROPERTY DEVT & INVT March 5, 2012

KEY CHARTS Malaysia’s affordability ratio

5.00

The affordability ratio (average household income/average mortgage payment) for the average property in Malaysia is near its all-time high due to a combination of lagging prices relative to income and the steep fall in mortgage rates.

4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50

19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10

0.00

Residential supply growth Supply growth of residential properties in Malaysia has been on a downtrend for the past 10 years. This is true for all the key major property markets including the Klang Valley, Johor and Penang. Malaysia’s residential property supply growth of 2.2% in 2010 was the lowest on record.

20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2001

2002

KL

2003

2004

Selangor

2005

Johor

2006

2007

Penang

2008

2009

Malaysia

2010

Klang Valley

House price vs. household income House prices in Malaysia used to move in tandem with income growth but the relationship broke down after the 1997/8 Asian financial crisis. House prices lag far behind per capita income but still outpace inflation. In 2000-2010, the average house price in Malaysia went up by a compounded rate of 3.5%, outpacing inflation of 2.2%.

Malaysia house price index

20 10

20 08

20 06

20 04

20 02

20 00

19 98

19 96

19 94

19 92

19 90

19 88

400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 0.0

Consumer Price Index

Mean household income

Most affordable in the region?

25.0

Malaysia’s average house price-to-mean annual household income ratio is the lowest in the region, at 4.6x. Kuala Lumpur’s average of 7.4x is low compared with other cities such as Singapore or Hong Kong.

22.3

22.1 20.0

20.0 14.3

15.0

12.7 8.8

10.0

7.4

6.7

5.9

4.6

5.0

al ay sia M

In do ne sia

Th ai la nd

na Si ng ap or e Ku al a Lu m pu r

Ch i

Ph ilip pi ne s

Ko ng Ho ng

Be ijin g

Sh an g

ha i

0.0

SOURCE: CIMB, DOS, BNM, PMR, MOF

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PROPERTY DEVT & INVT March 5, 2012

Figure 2: Sector Comparison Bloomberg Ticker BS SP CAPL SP CMA SP CIT SP FNN SP GLP SP HOBEE SP KPLD SP OUE SP SL SP UEM SP UOL SP WP SP WINGT SP

Agile Property China Overseas Grand Oceans China Overseas Land China Resources Land Evergrande Real Estate Guangzhou R&F KWG Property Holding Longfor Properties Poly Hong Kong Shimao Property Sino-Ocean Land SOHO China Hong Kong average Alam Sutera Bumi Serpong Damai Ciputra Development Ciputra Property Lippo Karawaci Summarecon Agung Indonesia average Eastern & Oriental KLCC Property Holdings Mah Sing Group SP Setia UEM Land Holdings UOA Development Malaysia average

Company Bukit Sembawang Estates CapitaLand CapitaMalls Asia City Developments Fraser & Neave Global Logistic Properties Ho Bee Investments Keppel Land Overseas Union Enterprise Singapore Land United Engineers UOL Group Wheelock Properties (S) Wing Tai Holdings Singapore average

Amata Corporation Asian Property Hemaraj Land And Houses LPN Development Pruksa Real Estate Quality Houses Sansiri Public Co Supalai PCL Thailand average Average (all)

Core P/E (x) CY2011 CY2012 7.7 5.2 36.3 38.2 35.1 24.5 17.4 18.5 16.8 15.1 36.4 25.9 7.1 10.0 19.0 13.9 26.0 20.3 10.8 12.4 2.9 7.4 6.9 11.5 10.2 16.5 5.5 7.0 17.2 17.8

3-yr EPS CAGR (%) 17.2% 17.4% 3.0% 7.0% 9.0% 26.4% -22.2% 10.3% 28.4% 8.7% 17.5% -5.4% -14.5% -0.3% 7.5%

Outperform Outperform Underperform Underperform Neutral Outperform Underperform Underperform Outperform Neutral Outperform Outperform Neutral Neutral

Price (local curr) 4.58 3.04 1.51 11.00 6.60 2.20 1.33 3.42 2.49 5.79 2.39 4.74 1.63 1.28

Tgt Px (local curr) 4.80 3.34 1.36 8.77 6.75 2.27 1.16 2.40 2.92 5.86 2.73 5.31 1.67 1.33

Mkt Cap (US$ m) 943 10,262 4,666 7,955 7,449 8,042 746 4,053 1,802 1,900 544 2,896 1,551 791

3383 HK 81 HK 688 HK 1109 HK 3333 HK 2777 HK 1813 HK 960 HK 119 HK 813 HK 3377 HK 410 HK

Neutral Outperform Outperform Outperform Trading Buy Neutral Neutral Outperform Neutral Neutral Neutral Outperform

10.30 9.51 15.86 14.38 4.71 9.63 4.80 10.82 4.76 9.49 4.39 5.67

9.40 11.00 18.90 17.00 5.00 6.10 5.00 14.60 3.25 7.00 3.50 7.00

4,581 1,866 16,714 10,804 9,045 4,001 1,791 7,192 2,215 4,241 3,204 3,794

7.0 11.3 10.7 14.0 6.8 6.1 6.0 10.5 9.5 6.6 8.0 17.5 9.3

6.2 8.9 9.4 12.1 5.2 5.7 5.2 8.5 7.5 5.9 6.8 5.7 7.6

11.6% 45.6% 21.7% 24.5% 38.0% 11.9% 25.2% 47.9% 20.9% 30.4% 20.2% 13.2% 25.9%

19.18 13.70 20.95 21.24 10.01 15.27 9.07 20.92 10.85 20.10 8.90 10.11

-46% -31% -24% -32% -53% -37% -47% -48% -56% -53% -51% -44% -54%

66.4% 21.7% 36.1% 67.9% 69.9% 85.3% 61.8% 49.8% 105.9% 68.6% 58.1% Net Cash 57.8%

1.34 2.81 2.01 1.51 2.16 1.13 0.84 2.39 0.74 0.92 0.61 1.25 1.46

1.15 2.19 1.72 1.39 1.68 1.01 0.75 1.99 0.69 0.84 0.57 1.09 1.28

20.7% 31.2% 20.3% 11.2% 36.0% 19.5% 14.9% 24.6% 8.0% 14.8% 7.9% 7.1% 16.7%

20.1% 27.7% 19.8% 12.0% 36.0% 18.7% 15.3% 25.6% 9.5% 14.9% 8.6% 20.4% 18.0%

3.6% 0.6% 1.9% 2.3% 4.4% 6.5% 5.6% 2.8% 3.3% 4.6% 3.1% 6.1% 3.2%

4.1% 1.1% 2.1% 2.7% 5.7% 6.6% 6.2% 3.5% 4.0% 5.4% 3.7% 6.1% 3.7%

ASRI IJ BSDE IJ CTRA IJ CTRP IJ LPKR IJ SMRA IJ

Outperform Outperform Outperform Outperform Neutral Neutral

570.0 1,180 690.0 700.0 710.0 1,330

610.0 1,200 700.0 850.0 700.0 1,410

1,226 2,260 1,146 471 1,794 1,001

17.8 27.0 31.2 26.8 26.0 26.9 25.3

12.9 18.8 20.3 19.0 22.4 25.6 19.0

65.1% 33.0% 46.9% 45.7% 10.0% 30.9% 36.3%

1,027 2,857 963.6 1,389 1,025 1,819

-45% -59% -28% -50% -31% -27% -43%

Net Cash Net Cash Net Cash Net Cash 21.3% Net Cash Net Cash

4.13 3.00 2.03 1.17 1.79 3.79 2.41

3.11 2.62 1.89 1.12 1.69 3.43 2.17

23.6% 11.8% 6.7% 4.6% 7.5% 14.9% 10.0%

27.6% 14.9% 9.6% 6.0% 7.8% 14.1% 12.1%

1.4% 0.3% 0.7% 1.0% 1.2% 0.5% 0.8%

2.0% 0.7% 0.9% 1.1% 1.2% 0.7% 1.1%

EAST MK KLCC MK MSGB MK SPSB MK ULHB MK UOAD MK

Trading Buy Underperform Trading Buy Trading Buy Trading Buy Trading Buy

1.68 3.42 2.24 3.94 2.34 1.49

1.77 3.03 2.51 4.30 2.56 1.84

630 1,058 617 2,468 3,350 590

28.0 11.3 11.0 22.6 30.9 7.9 18.5

16.7 10.3 8.0 18.0 27.1 6.0 15.1

47.9% 12.0% 37.1% 24.3% 36.2% 25.6% 34.4%

2.86 5.05 3.07 4.52 2.82 2.78

-41% -32% -27% -13% -17% -46% -22%

47.8% 15.8% 28.3% Net Cash 5.0% Net Cash 10.2%

1.46 0.70 1.74 2.08 2.09 0.99 1.54

1.44 0.51 1.51 1.98 1.96 0.91 1.33

5.6% 5.6% 17.5% 10.9% 8.0% 18.7% 9.0%

9.0% 5.6% 19.7% 11.2% 7.5% 15.5% 9.3%

1.6% 3.7% 3.7% 2.7% 0.0% 6.7% 2.0%

2.5% 3.5% 4.0% 3.1% 0.3% 8.1% 2.4%

AMATA TB AP TB HEMRAJ TB LH TB LPN TB PS TB QH TB SIRI TB SPALI TB

Outperform Outperform Outperform Outperform Outperform Outperform Underperform Outperform Outperform

16.50 5.80 2.64 7.10 14.00 14.00 1.81 2.06 14.10

25.44 6.48 2.72 7.46 16.50 17.61 1.25 2.75 15.10

579 538 843 2,342 680 1,017 505 481 796

18.9 10.7 61.5 28.1 10.8 10.9 28.1 7.5 9.1 15.4 12.6

14.4 8.2 13.8 21.8 8.6 8.1 18.1 6.6 7.5 11.2 10.8

42.1% 7.0% 19.4% 9.7% 21.6% 12.8% -13.0% 17.3% 13.9% 15.4% 20.6%

21.77 7.00 2.80 6.00 7.40 22.80 3.60 2.48 9.05

-24% -17% -6% 18% 89% -39% -50% -17% 56% -10% -42%

84.4% 115.5% 50.4% 58.3% 4.4% 103.2% 152.0% 100.4% 30.7% 80.1% 36.2%

2.92 1.56 2.87 2.46 2.90 1.83 1.17 1.19 2.22 2.06 1.28

2.61 1.38 2.65 2.40 2.44 1.56 1.10 1.20 1.86 1.85 1.16

Recom.

RNAV Prem./(Disc.) Gearing(%) CY2012 to RNAV (%) CY2011 9.60 -52% 37.8% 4.45 -32% 24.3% 1.80 -16% 3.8% 10.97 0% 21.0% 7.95 -17% 28.3% 2.27 -3% 30.5% 1.93 -31% 14.0% 4.00 -15% 1.6% 3.90 -36% 57.9% 10.66 -46% 4.1% 4.20 -43% 71.1% 7.08 -33% 35.7% 2.46 -34% Net Cash 2.05 -38% 30.9% -26% 21.6%

P/BV (x) Recurring ROE (%) Dividend Yield (%) CY2011 CY2012 CY2011 CY2012 CY2011 CY2012 1.10 0.94 15.1% 19.5% 2.4% 3.5% 0.88 0.86 2.5% 2.2% 1.4% 1.3% 0.92 0.90 2.7% 3.7% 2.0% 2.0% 1.54 1.45 9.2% 7.9% 1.6% 1.4% 1.33 1.27 8.1% 8.6% 2.7% 2.7% 1.16 1.11 3.6% 4.4% 0.3% 0.7% 0.60 0.57 9.2% 5.7% 1.4% 1.0% 1.13 0.83 6.3% 6.9% 2.4% 2.4% 0.81 0.79 3.3% 3.9% 4.4% 2.5% 0.54 0.53 5.4% 4.3% 3.5% 3.5% 0.57 0.54 22.1% 7.5% 6.5% 4.2% 0.72 0.69 11.2% 6.0% 3.1% 1.9% 0.67 0.66 6.9% 4.0% 3.7% 3.7% 0.52 0.49 9.4% 6.9% 3.4% 3.6% 0.98 0.93 6.0% 5.3% 2.0% 1.9%

16.8% 18.9% 1.9% 2.5% 15.9% 17.5% 3.7% 4.9% 4.8% 20.0% 0.9% 3.9% 9.1% 11.2% 5.3% 4.4% 30.0% 30.2% 4.6% 5.8% 18.2% 20.5% 2.7% 3.7% 4.2% 6.3% 3.0% 4.0% 18.5% 17.8% 6.4% 7.6% 26.8% 26.9% 4.8% 5.9% 14.3% 17.3% 3.9% 4.7% 10.7% 11.1% 2.6% 2.8% SOURCES: CIMB, COMPANY REPORTS

Calculations are performed using EFA™ Monthly Interpolated Annualisation and Aggregation algorithms to December year ends

3

PROPERTY DEVT & INVT March 5, 2012

Debunking the bubble myth 1. BACKGROUND 1.1 Worries about a property bubble

“The current rate of 5% on RPGT is not effective in curbing speculative activities. If not controlled, it will put pressure on the price of real estate. In the long run, it will jeopardise the ability of the low- and middle-income groups to buy houses.

Figure 3: Residential property prices in Kuala Lumpur

800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 0.0

19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09

Notes from the Field

There are widespread concerns that a property bubble is forming in Malaysia, particularly in the Klang Valley, and that fresh graduates and young adults are being priced out of the market. Residential prices rose 6.7% in Malaysia in 2010 compared to a 10-year CAGR of 3.3% up to 2009 while prices in Kuala Lumpur spiked up 12.2% in 2010 against a 10-year CAGR of 4.9%.

– PM/Finance Minister Datuk Seri Najib Razak in 2012 Budget speech

Malaysia house price index

KL house price index

KL terrace price index

KL semi-d price index

KL bungalow price index

KL high-rise index

SOURCES: CIMB, COMPANY REPORTS

The accelerating price appreciation comes on the back of robust sales by developers. Leading developers such as SP Setia, Mah Sing, UEM Land and UOA Dev achieved record sales in 2010/2011 and are targeting even higher sales in 2012. The strong price appreciation and sales gives the impression of a runaway property market.

Figure 4: SP Setia’s new sales (RM m) 4000 3500 3000 2500 2000 1500 1000 500 0 FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12F

SOURCES: CIMB, SP Setia

4

PROPERTY DEVT & INVT March 5, 2012

1.2 Government’s response to concerns The government’s response to rising prices has been to initiate several schemes to make homeownership more affordable. The first scheme was unveiled in the 2011 Budget in Oct 2010. Called My First Home Scheme (MFHS), it was launched in March 2011 and aims to help young adults earning less than RM3,000 a month to purchase their first home with financing of up to 100%.

The value of property eligible for purchase was raised from RM100k-220k to RM400k during the tabling of the 2012 Budget in Oct 2011.

Figure 5: My First Home Scheme details Loan (LTV)/Financing

Property type Purpose of loan/financing Loan/financing tenure Borrower/customer

Employment Income/liquidity reserve

Credit criteria Property type

Upon qualification of the scheme, banks will provide 100% financing to purchase the property. As per existing banks’ policies, participating banks can still finance an additional 5% for Insurance/MRTT, legal and valuation fees, but this will not be covered

by Cagamas SRP Bhd and subject to bank’s discretions.

Completed residential properties. For property under construction, the guarantee protection/cover will only commence upon full disbursement/property fully completed.

To finance purchase of a house. Not applicable for refinancing.

Max 30 years, subject to not exceeding borrower’s age of 65 (based on younger borrower’s age, for joint application) at loan maturity-(Subject To Bank’s Discretions).

Malaysian citizenship only. Young adults not exceeding 35 years of age. First time homebuyers only (defined through CCRIS checks) and declaration in application form and letter of offer. Joint borrowers/customers, if any, must be related as immediate family members (spouse, children and sibling) Confirmed employee with minimum 6 months employment with same employer. Not for self employed and goverment staff.

Max salary of up to RM3,000 per month per individual borrower/customer. Joint application with combined gross income of up to RM 6,000 with single borrower’s gross income not exceeding RM3,000/month. Bonus excluded from calculations.

Borrower/customer must show saving habit with average balance equivalent to 3 times instalments in the past 3 months. Example, instalment of RM1,000 per month, average saving balance is RM3,000 in the past 3 months.

No adverse credit checking Residential properties only (landed and non landed). OMV/SPA ( whichever is lower) to be from RM100,000 to RM400,000 Minimum 60 years to expiry leasehold period. Any exception will require prior approval of Cagamas SRP Bhd before consideration.

SOURCES: CIMB, MFHS

In July 2011, Prime Minister Datuk Seri Najib Razak launched Program Perumahan 1Malaysia or 1Malaysia Housing Programme (PR1MA) for the middle income group, i.e. those earning not more than RM6,000 per month.

The programme’s aim is to assist this group who cannot afford high-end properties and are not eligible for existing MFHS and other low-cost public housing schemes.

Figure 6: PR1MA details

Programme

Features Eligibility

Restriction Financing

42,000 houses on 20 strategic sites in Klang Valley, Rawang and Seremban 8 projects expected to commence in 2011 & 2012 Developers: Putrajaya Holdings, SP Setia, Tradewinds, Cyberview, Sime Darby, MRCB and 1MDB Each unit will be sold at RM150,000-300,000 depending on location and size Each unit will be between 800 and 1,400 sq ft with three bedrooms and two bathrooms Malaysian citizens with monthly income less than RM6,000 First time home buyer Open for all Malaysians who work with the government, private sector or self-employed Not allowed to sell the house within 10 years to prevent speculative activities Not allowed to rent the unit. Only for own occupation Financing up to 105% from selected financial institutions The additional 5% is for insurance and S&P legal fees Stamp duty will be exempted Maximum financing tenure of 30 years EPF savings withdrawal through the existing mechanisms SOURCES: CIMB, PR1MA

5

PROPERTY DEVT & INVT March 5, 2012

Figure 7: Development target of PR1MA phase 1 No. Location

Developer

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Putrajaya Holdings SP Setia and Tradewinds Cyberview Sime Darby Sime Darby MRCB Putrajaya Holdings Putrajaya Holdings Putrajaya Holdings Putrajaya Holdings Putrajaya Holdings Putrajaya Holdings Sime Darby Sime Darby Sime Darby Putrajaya Holdings Sime Darby Sime Darby Sime Darby 1MDB TOTAL

Presint 11, Putrajaya Bandar Tun Razak, Cheras Cyberjaya Bandar Ainsdale, Seremban Putra Heights, Subang Jaya Seremban Sentral Presint 11-2, Putrajaya Presint 5, Putrajaya Presint 17-1, Putrajaya Presint 17-2, Putrajaya Presint 19-1, Putrajaya Presint 19-2, Putrajaya Ara Damansara, Petaling Bandar Bukit Raja, Klang Elmina East, Shah Alam Presint 19-3, Putrajaya Elmina West, Shah Alam Kota Elmina, Sg. Buloh Lagong Mas, Petaling Sg. Besi, Kuala Lumpur

Size No of Units (Acre) 7.6 560 10.0 1320 14.8 794 142.0 2,220 7.4 260 37.4 3,000 3.0 255 11.8 1,062 4.1 739 8.2 368 10.8 970 11.9 1,067 4.9 560 102.9 2,090 31.2 420 9.1 823 620.0 6,300 400.0 3,950 620.0 6,300 10,000 2,057.1 43,058

Target Q3 2011 Q4 2011 Q1 2012 Q4 2011 Q1 2012 Q2 2012 Q2 2012 Q2 2012 Q4 2013 Q4 2013 Q4 2015 Q4 2015 Q2 2012 Q2 2014 Q3 2014 Q4 2016 Q3 2017 Q3 2017 Q3 2018 Under Planning

SOURCES: CIMB, PR1MA

Besides addressing the pricing and supply side of the equation, the government has also made attempts to cool down the property market by imposing curbs on speculation, for instance, the 70% cap on the loans-to-value ratio for the third residential property announced in Oct 2010. It has also been gradually raising the real property gains tax (RPGT), which was suspended in 2007. In Oct 2009, the government reinstated the RPGT at a marginal rate of 5% starting Jan 2010.

In the 2012 Budget, it was raised to 10% for the first two years. While the imposition of the first RPGT in 2010 had the effect of dampening speculative demand for 2-3 months after the announcement, residential prices remained firm, leading to a resumption of strong buying. We expect a similar impact from the second increase which took effect on 1 Jan 2012.

Figure 8: Real property gains tax Up to 2007 30% 30% 20% 15% 5% 0% Individual

1st year 2nd year 3rd year 4th year 5th year 6th year onwards

Up to 2007 30% 30% 20% 15% 5% 5% Corporate

Up to 2007 30% 30% 30% 30% 30% 5% Foreigners

Apr-07 0% 0% 0% 0% 0% 0% For all

Jan-10 5% 5% 5% 5% 5% 0% For all

Jan-12 10% 10% 5% 5% 5% 0% For all

SOURCES: CIMB, MOF

2. OUR TAKE ON THE PROPERTY “BUBBLE�

2.1 Affordability index near all-time highs While we agree that there could be some froth in selected property products in certain locations such as the acclaimed Desa Park City project in Kuala Lumpur, we believe that talk of a bubble and an imminent collapse in prices is exaggerated. For one, the affordability index (average mean household income/average mortgage payments) for Malaysia and even the Klang Valley is near its all-time high. Note that our affordability index in this note has been inversed from the typical measure of mortgage payments over the average mean household income. This is for a more intuitive graphical depiction where a higher ratio indicates an improvement in affordability.

6

PROPERTY DEVT & INVT March 5, 2012

Figure 9: Affordability index for Malaysia

Figure 10: Affordability index for Klang Valley

5.00

4.00

4.50

Title: Source:

3.50

4.00

Please fill in the values above to have them entered in your report

3.00 3.50 2.50

3.00 2.50

2.00

2.00

1.50

1.50 1.00 1.00 0.50

0.50

19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10

0.00

19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10

0.00

SOURCES: CIMB, BNM, DOS, PMR, MOF

SOURCES: CIMB, BNM, DOS, PMR, MOF

There are two key reasons why the affordability index for Malaysia is so favourable 1) for many years after the 1997/8 Asian financial crisis, property prices lagged behind household incomes, and 2) mortgage rates have plunged by more than half and continue to remain low. For the Klang Valley, residential price appreciation slightly exceeded income growth. It was lagging behind for most years until a sudden jump in 2010. The 11-year residential price CAGR for Klang Valley is 4.5% vs. a mean household income CAGR of 4%. But the fall in mortgage rates has more than offset the higher pace of home price appreciation relative to household incomes.

Figure 11: Malaysia house price vs. household income

Figure 12: Klang Valley house price vs. household income

170.0

170.0

Title: Source:

160.0

160.0

Please fill in the values above to have them entered in your report

150.0

150.0

140.0

140.0

130.0

130.0

120.0

120.0

110.0

110.0

100.0

100.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Malaysia house price index

Malaysia household income

1999

CPI

2000

2001 2002

2003

KV price index

SOURCES: CIMB, BNM, DOS, PMR, MOF

2004

2005

2006

2007 2008

KV household income

2009

2010

CPI

SOURCES: CIMB, BNM, DOS, PMR, MOF

Mortgage rates in Malaysia have collapsed since the pre-Asian financial crisis period. In the 10 years before the crisis, base lending rate (BLR) ranged between 7% and 9% while the spread between BLR and mortgage rates ranged between 1% and 2%. But interest rates were brought down significantly when capital controls were imposed. By the early 2000s, BLR hovered around 6-7%. The spread between BLR and mortgage rates also narrowed to 0-1% during that period, leading to a fall of up to 5% pts in the effective borrowing cost from 8-11% to only 6-8%. While BLR has been relatively stable at 6-7% since then, the spread between BLR and mortgage rates has gone into negative territory. Banks offer rates of BLR -2% and, in some cases, even close to BLR -3%. Average mortgage rates are now below 5%.

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PROPERTY DEVT & INVT March 5, 2012

Figure 13: Interest rate compression 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0%

20 10

20 08

20 06

20 04

20 02

20 00

19 98

19 96

19 94

19 92

19 90

19 88

19 86

19 84

19 82

19 80

0.0% -2.0% -4.0%

BLR

Spread

Mortgage rates

SOURCES: CIMB, BNM

The key question is whether interest rates can stay at current levels and whether the spread between BLR and mortgage rates will stay in such deep negative territory. Our economics team believes that Malaysian interest rates will remain accommodative for the foreseeable future and expects the overnight policy rate to be cut by 25-50bp this year to 2.50-2.75% if domestic growth loses traction.

This is because of the double-dip recession in Europe and the lethargic growth in the US. For Malaysia, we are projecting a slowdown in real GDP growth from 5.1% in 2011 to 3.8% in 2012. To spur economic activity, interest rates have to be kept at relatively low levels.

Figure 14: Interest rate trends

Simple average 1981-1990 1991-2000 2001-2010 2001-2005 2006-2010

Real GDP % yoy 6.0 7.2 4.7 4.8 4.5

CPI % yoy 3.3 3.6 2.2 1.7 2.7

BLR (endperiod) % p.a.

9.0 8.2 6.3 6.2 6.3

BNM's policy rate % p.a.

7.1 6.8 3.5 4.0 3.0

Real interest 10-year MGS Loan-to-GDP rate bond yield ratio % p.a. % p.a. % 3.8 80.0 3.2 120.7 1.3 4.1 110.1 2.3 4.3 113.8 0.3 3.9 106.4

SOURCES: CIMB, BNM

Figure 15: Global and regional real GDP growth (% yoy) US Eurozone Japan China Hong Kong Indonesia Malaysia Singapore Thailand

2001 1.1 2.0 0.4 8.3 0.5 3.6 0.5 -1.2 2.2

2002 1.8 0.9 0.3 9.1 1.8 4.5 5.4 4.2 5.3

2003 2.5 0.7 1.7 10.0 3.0 4.8 5.8 4.6 7.1

2004 3.5 2.0 2.4 10.1 8.5 5.0 6.8 9.2 6.3

2005 3.1 1.8 1.3 11.3 7.1 5.7 5.3 7.4 4.6

2006 2.7 3.3 1.7 12.7 7.0 5.5 5.8 8.8 5.1

2007 1.9 3.0 2.2 14.2 6.4 6.3 6.5 8.9 5.0

2008 -0.3 0.3 -1.0 9.6 2.3 6.0 4.8 1.7 2.5

2009 -3.5 -4.2 -5.5 9.2 -2.6 4.6 -1.6 -1.0 -2.3

2010 3.0 1.7 4.4 10.4 7.0 6.2 7.2 14.8 7.8

2011 1.7 1.5 -0.9 9.2 5.0 6.5 5.1 4.9 0.1

2012E 1.5-2.0 -0.8 1.0 8.0 4.0-5.0 6.2 3.8 2.8 6.0

SOURCES: CIMB, CEIC

Figure 16: Malaysia's real GDP growth (% yoy) Supply side Real GDP Agriculture Mining Construction Manufacturing Services

2001 0.5 -0.2 -1.7 3.3 -4.3 4.1

2002 5.4 2.9 4.4 2.3 4.1 5.8

2003 5.8 6.0 6.1 1.8 9.2 4.2

2004 6.8 4.7 4.1 -0.9 9.6 6.4

2005 5.3 2.6 -0.4 -1.5 5.2 7.2

2006 5.8 5.2 -1.0 -0.3 6.7 7.4

2007 6.5 1.3 2.0 7.3 2.8 10.2

2008 4.8 4.3 -2.4 4.2 1.2 7.6

2009 -1.6 0.6 -6.3 5.9 -9.3 3.1

2010 7.2 2.1 0.2 5.1 11.4 6.8

2011 5.1 5.6 -5.7 3.5 4.5 6.8

2012E 3.8 3.5 2.6 7.0 2.3 4.6

SOURCES: CIMB, BNM

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PROPERTY DEVT & INVT March 5, 2012

As for bank lending trends, our banking analyst does not think that mortgage rates will revert from BLR -2%+ currently to BLR+ 2% in the 1990s due to the stiff competition in this market segment. Most banks are keen to compete for business in this segment due to good collateral coverage and, therefore, lower credit risks. Furthermore, lending rates generally trend downwards as the banking industry becomes more mature. Malaysia's banking system is considered mature with a loan-to-GDP ratio of about 112.5%. In the longer term, we expect Malaysian banks' lending yield and NIM (of about 2.2% currently) to decline to the 2% level of more mature markets like Singapore and Hong Kong.

2.2 Price appreciation largely due to market forces We have put down on paper several times before our view that the rise in residential property prices is largely due to demand and supply forces. In fact, we are surprised that residential property prices have not appreciated at a faster pace as new supply has fallen significantly over the past few years. Supply growth of residential property in Malaysia and the Klang Valley eased gradually from 12-13% in 2001 to only 2-3% in 2010.

Figure 17: Residential property supply growth 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2001

2002

KL

2003

Selangor

2004

2005

Johor

2006

Penang

2007

2008

Malaysia

2009

2010

Klang Valley

SOURCES: CIMB, COMPANY REPORTS

Figure 18:

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Housing (units)

Starts 154,733 152,946 142,563 41,924 23,137 135,899 166,143 155,589 152,852 142,594 133,948 107,856 86,743 84,210

Under Completion Existing stock construction 102,943 1,670,285 374,692 121,987 1,797,542 417,343 128,351 2,315,059 399,316 69,329 2,366,925 377,284 112,157 2,761,242 480,517 156,042 2,991,738 572,961 187,178 3,237,599 584,531 165,964 3,467,812 641,771 180,600 3,680,462 637,208 170,962 3,850,568 608,840 181,123 4,063,167 573,716 130,309 4,193,150 551,263 103,335 4,338,609 538,894 95,938 4,433,310 527,166

Future supply 269,406 353,028 452,924 394,304 503,654 504,930 527,386 625,857 636,783 648,174 666,928 673,871 667,936 660,032

Completion/ stock 6.2% 6.8% 5.5% 2.9% 4.1% 5.2% 5.8% 4.8% 4.9% 4.4% 4.5% 3.1% 2.4% 2.2%

Starts/stock 9.3% 8.5% 6.2% 1.8% 0.8% 4.5% 5.1% 4.5% 4.2% 3.7% 3.3% 2.6% 2.0% 1.9%

SOURCES: CIMB, PMR

However, the drop in supply growth is not entirely unexpected as the key major property markets in Malaysia, i.e. the Klang Valley, Johor and Penang, have reached a certain maturity and saturation as supply has caught up with demand.

The shortfall of residential property is relatively low in Kuala Lumpur and Penang which are largely fully urbanised. There is still a shortage of residential properties in Johor and Selangor to the tune of around 100,000 units. But there is significant shortage in other states throughout the country with the exception 9

PROPERTY DEVT & INVT March 5, 2012

of Negeri Sembilan. Total shortage for the country amounts to nearly 2m homes.

Many Malaysians still live in shophouses, squatter areas, longhouses and homes not made from brick.

Figure 19: Shortfall of residential property in Malaysia in 2010 (units)

Malaysia Sabah Sarawak Kelantan Kedah Perak Terengganu Selangor Pahang Johor Melaka Penang Perlis KL Negeri Sembilan

Population 27,565,821 3,205,312 2,420,009 1,459,994 1,890,098 2,258,428 1,015,776 5,479,288 1,443,365 3,233,434 788,706 1,520,143 227,025 1,627,172 977,071

Household size 4.31 5.88 4.47 4.86 4.29 4.04 4.78 3.93 4.59 4.17 4.05 3.94 4.26 3.72 4.20

Real demand 6,387,014 545,121 541,389 300,410 440,582 559,017 212,505 1,394,221 314,459 775,404 194,742 385,823 53,292 437,412 232,636

Actual homes 4,433,310 153,022 195,324 55,467 260,375 380,602 52,213 1,280,927 212,068 674,188 151,586 348,343 20,608 415,860 232,727

Shortfall/ (surplus) 1,953,704 392,099 346,065 244,943 180,207 178,415 160,292 113,294 102,391 101,216 43,156 37,480 32,684 21,552 (91)

SOURCES: CIMB, DOS, PMR

Tight supply in the primary market has led to a rise in secondary market prices.

This is especially true for landed property due to the increasing scarcity of land.

In the Klang Valley, house buyers prefer not to buy properties located too far away from the city centre as travelling time and toll costs can be a considerable burden. As can be seen from the following chart, landed residential prices have appreciated faster than prices of high-rise properties in the Klang Valley over the past 10 years. Those in Kuala Lumpur top the charts due to greater scarcity.

On the other side of the spectrum are high-rise residential properties in Selangor which barely budged, rising at a CAGR of only 0.9%. This is not surprising as supply of high-rise properties is a lot more elastic in Selangor where land is still relatively abundant. High-rise high-density apartment buildings do not require large tracts of land, unlike landed properties.

Figure 20: Residential property prices in the Klang Valley (indexed)

190.0 170.0 150.0 130.0 110.0 90.0 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

KL terrace

KL high-rise

KL bungalow

KL semi-D

S'gor terrace

S'gor high-rise

S'gor bungalow

S'gor semi-D

2010

SOURCES: CIMB, COMPANY REPORTS

As can be seen from the following chart, the 9-year CAGR of residential property supply is the highest for high-rises in Selangor, with most of the growth coming from condominiums and apartments. The CAGR for terraced houses in Kuala Lumpur was only 1.1%, which is why prices of terraced houses have shot up in the past couple of years. Also, the supply of bungalows in Malaysia and Kuala Lumpur in particular has increased at the slowest pace which explains why the

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PROPERTY DEVT & INVT March 5, 2012

long-term rate of appreciation is also the highest. It would appear that demand-supply is the key driver of prices.

Figure 21: 9-year CAGR of residential supply (2002-2011) KL Selangor Klang Valley Penang Johor Other states Malaysia

Low cost 8.5% 4.9% 5.8% 3.8% 1.5% 3.5% 3.9%

Terrace 1.1% 5.3% 4.6% 4.3% 4.9% 4.9% 4.8%

Semi-D 3.8% 11.7% 10.2% 4.4% 2.3% 5.0% 5.2%

Bungalow -0.8% 6.9% 5.5% 4.8% 0.3% 2.0% 2.0%

High rise 4.9% 9.5% 7.6% 4.5% 5.3% 6.7% 6.8%

Condo/Apt 6.6% 13.3% 9.9% 5.6% 8.6% 6.7% 8.9%

Flats 1.0% 5.8% 4.4% 4.1% 2.0% 6.7% 4.3%

Total 4.5% 6.5% 5.9% 4.3% 3.2% 4.2% 4.7%

SOURCES: CIMB, PMR

Figure 22: Residential stock in 2011 (units) KL Selangor Klang Valley Penang Johor Other states Malaysia

Low cost Terrace Semi-D Bungalow High rise Condo/Apt 99,433 95,462 6,190 6,835 206,645 156,489 279,100 574,725 39,104 44,775 364,751 213,457 378,533 670,187 45,294 51,610 571,396 369,946 69,772 106,839 23,676 6,606 147,435 38,241 169,725 333,267 42,023 85,051 52,428 30,558 426,871 766,983 185,090 259,695 118,142 81,609 1,044,901 1,877,276 296,083 402,962 889,401 520,354

Flats 50,156 151,294 201,450 109,194 21,870 36,533 369,047

Total 414,565 1,302,455 1,717,020 354,328 682,494 1,756,781 4,510,623

SOURCES: CIMB, PMR

2.3 It is not all rosy “Bubble” is defined in the dictionary as something which is unsteady, risky or unlikely to last. To many, a “bubble” is something that is inflating rapidly and where buyers are throwing caution to the wind. We do not think that either definition fits the bill for the residential property sector. Firstly, Malaysia still has a property overhang that has not suddenly disappeared. The overhang is most serious in Johor and is considerable even in Kuala Lumpur. The ratio of unsold stock to the estimated annual housing needs of Johor stands at 88%. The ratio is 65% for Kuala Lumpur while the country’s average is 55%. We are not concerned about the figure for Kuala Lumpur as a more relevant gauge is the overall 35% figure for the Klang Valley as Selangor’s overhang/needs ratio is a low 29% due to its high population growth. The authorities are encouraging urban redevelopment so that people move back into the city centre. However, it takes time before completed units are filled.

Figure 23: Unsold residential property Klang Valley K. Lumpur 28,923 3,604 24,939 2,713 27,471 7,751 20,961 5,931 19,630 5,808 21,381 6,612 18,246 6,327

2004 2005 2006 2007 2008 2009 2010 2010 Overhang (units) Population (m) Population growth (%)# Avg household (no.)* Housing needs (units) Overhang/needs Total stock Overhang/total stock # CAGR from 2000-2010 * Based on 2010 census

Selangor 25,319 22,226 19,720 15,030 13,822 14,769 11,919

Johor Penang 17,817 3,550 19,735 3,173 21,523 1,393 18,407 1,164 19,015 1,888 17,078 2,483 16,039 1,401

Others 29,218 32,859 35,104 35,566 35,846 38,921 43,290

Malaysia 79,508 80,706 85,491 76,098 76,379 79,863 78,976

Klang Valley K. Lumpur Selangor Johor Penang Others Malaysia 18,246 6,327 11,919 16,039 1,401 43,290 78,976 6.83 1.66 5.18 3.39 1.58 16.51 28.31 2.94 2.20 3.17 2.24 2.11 1.97 2.17 3.88 3.72 3.93 4.17 3.94 4.54 4.31 51,800 9,788 41,779 18,184 8,447 71,606 142,518 35.2% 64.6% 28.5% 88.2% 16.6% 60.5% 55.4% 1,696,787 415,860 1,280,927 674,188 348,343 1,713,992 4,433,310 1.1% 1.5% 0.9% 2.4% 0.4% 2.5% 1.8%

SOURCES: CIMB, BNM, PMR

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PROPERTY DEVT & INVT March 5, 2012

Looking at the key KLCC and Mont’ Kiara condo markets which are likely significant contributors to the overhang figure in Kuala Lumpur, it is interesting that property market conditions there are not remotely “bubbly.” If anything, one can argue that the property bubbles in these two areas burst several years ago. Massive oversupply in these markets led to sharp declines in capital and rental rates over the past few years. The 2008/9 global financial crisis was the initial trigger but it is the oversupply in subsequent years that is keeping prices depressed. Developers have had to throw in steep discounts to clear old stocks and are now launching small serviced apartment-type units rather than larger ones. This certainly does not point to bubbly market conditions.

Returning to the Desa Park City project which many cite as an example of a bubble, there is a case to be made for its high prices which are RM1.4m onwards for linkhouses, up to RM4m for superlinks and semi-Ds, above RM400 psf for bungalow land and up to RM750 psf for condos. The gated project commands a big price premium because it has two levels of security, very attractive landscaping, a lake and park for residents, a private school and a private hospital. It is a very well-planned, self-contained lifestyle development that holds great appeal to upgraders. The developer’s success has spawned many copycats and many consider the project to be a role model for developers.

Owners of high-rise apartments in Selangor and overall Johor residential properties are some of the biggest long-term sufferers. From 1996 to 2010, the price of high-rise residential properties in Selangor eked out a pitiful CAGR of 0.3% while overall residential prices in Johor notched up a CAGR of 0.9%. The growth rates were so slow that they trailed behind the 2.5% inflation and 4.2% growth of mean household income. This means that those buying a high-rise property in Selangor or an average property in Johor today would be paying less in inflation-adjusted dollars than buyers in 1996. Again, these are far from “bubble” conditions.

Figure 24: House price indices in major markets 400.0 350.0 300.0 250.0 200.0 150.0

19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10

100.0

Malaysia house price index

KL house price index

Johor house price index

Penang house price index

Selangor house price index

SOURCES: CIMB, PMR

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PROPERTY DEVT & INVT March 5, 2012

Figure 25: 1996-2010 house price CAGR for major markets Household income KL semi-d price index KL bungalow price index KL terrace price index Penang price index Selangor semi-d price index KL house price index Selangor house price index Selangor terrace price index Consumer Price Index Klang Valley price index Malaysia house price index KL high-rise index Johor price index Selangor bungalow price index Selangor high-rise price index 0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

SOURCES: CIMB, PMR, DOS, BNM

Figure 26: 2000-2010 house price CAGR in Malaysia Sabah Terengganu Perlis Pahang K. Lumpur Kedah Perak Saraw ak Penang Kelantan Malacca Malaysia N. Sembilan Selangor Johor -1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

SOURCES: CIMB, PMR

3. OUTLOOK 3.1 Residential prices have more upside Based purely on the affordability index, residential property prices in Malaysia and the Klang Valley have substantial upside. For the Malaysian residential property affordability index to return to the 1987-2000 range, prices have to surge 70-100%. For the Klang Valley, home prices have to jump 50-80% to return to the pre-Asian financial crisis levels. As residential property prices in Malaysia have never appreciated at those rates within a 12-month timeframe, it would take, at the minimum, a few years for those levels to be achieved. Taking into account annual household income gains and inflation, the upside potential for residential home prices over the long term would be even higher than our sensitivity analysis.

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PROPERTY DEVT & INVT March 5, 2012

Figure 27: Malaysia house price has to rise 70-100% for affordability to fall to 1987-2000 levels

Figure 28: Klang Valley house price has to rise 50-80% for affordability to fall to 1987-2000 levels Title: Source:

4.50

7.00

4.00

6.00

Please fill in the values above to have them entered in your report

3.50 5.00

3.00

4.00

2.50

3.00

2.00 1.50

2.00

1.00 1.00

0.50

0.00

Affordability

KV house price index

SOURCES: CIMB, PMR, MOF, BNM, DOS

Affordability

SOURCES: CIMB, PMR, MOF, BNM, DOS

However, one of the key assumptions here is that the 1987-2000 affordability range is an appropriate benchmark and “ideal” range. With a maturing economy and slowing income growth, it could be argued that the low affordability ratio of the past is inappropriate. Also, the other major assumption is that mortgage rates can stay low for an extended period of time. As it is difficult to predict that far into the future, it is anybody’s guess whether tight labour conditions, surging commodity prices and high inflationary pressures will push interest rates sky-high, like in the 1970/80s. But we are reasonably confident that interest rates will stay accommodative in the short- to medium-term.

3.2 Number of years to buy a home Another measure of affordability is the average house price-to-mean household income ratio. Malaysia’s ratio is not particularly high at 4.6x. This means for the average family, it takes 4.6 years of its income to buy an average home. Many are surprised at this low figure given that the average household income was only RM4,025/month as at 2009. This is because the average transacted price of a residential property in Malaysia in 2010 was only RM223,270. Kuala Lumpur’s ratio is the highest at 7.4x while Terengganu’s is the lowest at 2x. The average price of a home in Kuala Lumpur in 2010 was RM488,536 while that of Terengganu was RM74,064.

Figure 29: Average home price/mean household income 2009/10 (x) 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0

Te re ng ga nu

M al ac ca

Ke la nt an

em bi la n

Pe ra k N

g.

S

ak Sa ra w

Pe rl i s

Jo ho r

Ke da h

Pe na ng M al ay si a Se la ng or

KL

Sa ba h

0.0

Pa ha ng

Malaysia house price index

19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10

19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10

0.00

SOURCES: CIMB, PMR, DOS, BNM

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PROPERTY DEVT & INVT March 5, 2012

Figure 30: Home value/household income in Malaysia Mean household income 2009 3,835 4,184 3,540 2,809 4,407 5,962 5,488 2,667 2,536 3,279 2,617 3,102 3,581 3,017 4,025

Johor Melaka Negeri Sembilan Perak Pulau Pinang Selangor Kuala Lumpur Kedah Kelantan Pahang Perlis Sabah Sarawak Terengganu Malaysia

Average house price 2010 166,799 127,082 116,830 94,757 265,124 290,666 488,536 122,771 82,338 127,290 106,448 222,699 142,914 74,064 223,270

2009/10 3.6 2.5 2.8 2.8 5.0 4.1 7.4 3.8 2.7 3.2 3.4 6.0 3.3 2.0 4.6

SOURCES: CIMB, PMR, DOS

The reason why many are surprised at the low value of the average home in Malaysia or Kuala Lumpur for that matter is the strong preference for landed properties with security features. The majority of Malaysians grew up in the ubiquitous terraced house and want some space for gardening or to park their numerous cars. But land is becoming increasingly scarce and potential buyers have to pay a premium for even a terraced house, especially in the capital city or the landlocked Penang island. As a result, developments such as Desa Park City which are gated and guarded can sell superlinks at above RM2m each.

But Desa Park City is not your average home. It is the subject of much press coverage and coffee shop chatter but does not represent the average home. The most common home in Kuala Lumpur is not even the terraced house. Terraced houses make up 31% of total residential stock but high-rise properties make up 48%. Condos and apartments make up 32% pts of the 48% while flats make up the other 16% pts. A significant 24% of all residential properties in Kuala Lumpur are low-cost homes (46% are flats and 54% homes). Few realise that there are more low cost homes than terraced houses in Kuala Lumpur. As a result, it should not be a surprise that landed property in Kuala Lumpur has appreciated strongly over the past few years. All the most prestigious neighbourhoods in Malaysia are located in Kuala Lumpur and these are a favourite target for the nouveau riche and upgraders.

Figure 31: Supply of residential property in Kuala Lumpur Bungalow Low cost flats 3% 8%

Semi-D 2% Condo/Apt 31%

Low cost homes 9%

Flats 16%

Terrace 31%

SOURCES: CIMB, PMR

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PROPERTY DEVT & INVT March 5, 2012

Figure 32: Stock - 2011 KL Selangor Klang Valley Penang Johor Other states Malaysia

Low cost 24% 21% 22% 20% 25% 24% 23%

Terrace 23% 44% 39% 30% 49% 44% 42%

Semi-D 1% 3% 3% 7% 6% 11% 7%

Bungalow 2% 3% 3% 2% 12% 15% 9%

High rise 50% 28% 33% 42% 8% 7% 20%

Condo/Apt 38% 16% 22% 11% 4% 5% 12%

Flats 12% 12% 12% 31% 3% 2% 8%

Total 100% 100% 100% 100% 100% 100% 100%

SOURCES: CIMB, PMR

Relative to its regional peers, affordability based on average home price-to-mean household income in Malaysia seems to be the best. Malaysia’s ratio of 4.6x is the lowest in the region, lower than even Thailand or Indonesia.

Even Kuala Lumpur’s ratio of 7.4x is below the region’s average of 11.4x.

Relative to north Asian cities’ ratios of 20x or more, Kuala Lumpur is downright cheap.

Figure 33: Home value/household income in the region 25.0 22.3

22.1 20.0

20.0

14.3

15.0

12.7

10.0

8.8 7.4

6.7

5.9 4.6

5.0

0.0 Shanghai

Beijing

Hong Kong Philippines

China

Singapore

Kuala Lumpur

Thailand

Indonesia

Malaysia

SOURCES: CIMB, PMR, DOS

3.3 ETP and Greater KL One very positive development for Malaysian properties, particularly those in the Klang Valley is the Economic Transformation Programme and the focus on transforming Greater Kuala Lumpur into one of the top 20 most liveable cities in the world by 2020. Greater Kuala Lumpur will benefit significantly from two mega projects – the RM50bn MRT and the RM16.5bn high-speed rail. The MRT project will improve public transportation in the Klang Valley and help alleviate the traffic jams that plague Kuala Lumpur. It should also lift the value of properties in central Kuala Lumpur by improving underground connectivity and enhancing the shopping experience.

If the high-speed rail project materialises, it could boost property prices in Kuala Lumpur significantly as values are far behind Singapore’s and travelling time between the two cities could be reduced from 4-6 hours to 1½-2 hours. The high-speed rail project will also benefit property prices in Iskandar Malaysia as the proposed train will stop in Johor Bahru before going on to Singapore. This could induce KLites to buy properties in Iskandar Malaysia as a cheaper alternative to properties in Singapore. Phase 2 of the project extends the rail service all the way to Penang island, which is good news for the Penang property market too.

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PROPERTY DEVT & INVT March 5, 2012

Figure 34: Greater KL NKEA EPP 1. Attract 100 top MNCs 2. High skilled immigration Greater KL connection 3. High Speed Rail 4. MRT Greater KL new places 5. Rejuvenante river life 6. Greener KL 7. Iconic places Greater KL enhanced series 8. Pedestrian network 9. Solid waste water

Business Opportunities

Greater KL

1. Revitalise Putrajaya 2. Housing 3. Basic services - water, sewerage, electricity

SOURCES: CIMB, PEMANDU

Other projects that will add to Kuala Lumpur’s appeal are the 1) RM3.5bn river of life project which will beautify 10.5km of rivers passing through the capital and 2) the 44km of covered pedestrian network linking all the major attractions and heavy pedestrian areas in the city. As part of the drive to transform Greater Kuala Lumpur into an outstanding capital city, the population is targeted to rise from 6m currently to 10m by 2020. Of the 4m increase in population, an estimated 500,000 will be expatriates or Malaysians returning from overseas.

Assuming four persons per home, it is estimated that 1m homes will have to be constructed to meet the requirements of an enlarged population base. Given that new supply of residential homes in the Klang Valley averaged only 60,000 per year over the past five years, there will be a shortage of homes unless developers are more aggressive in their launches. The shortage will push up prices even more.

Figure 35: Proposed pedestrian network in Kuala Lumpur

Figure 36: Proposed River of Life project

SOURCES: CIMB, Pemandu

17

SOURCES: CIMB, Pemandu

PROPERTY DEVT & INVT March 5, 2012

4. RISKS 4.1 High consumer debt Malaysia’s household debt rose at a rapid rate of 11.7% p.a. during 2004-11.

From RM275.2bn or 65.7% total GDP as at end-2003, it climbed to an estimated RM664.7bn or 78% of total GDP as at end-2011. Though households’ balance sheets remain in good shape with financial assets covering total household debt by about 2.4x at end-2010, the rising debt trends can also indicate increasing financial vulnerability as household leverage rises in tandem with elevated real estate prices and stockmarkets. If these asset prices fall sharply, households could find themselves saddled with debt overhang and heavy debt-servicing costs. Rising household debt not only constrains monetary policy but also poses risks to consumer spending. Should the central bank increase interest rate, it would add to households’ debt burdens.

Figure 37: Household debt

700.0

90.0% 80.0%

600.0

70.0% 500.0

60.0%

400.0

50.0%

300.0

40.0% 30.0%

200.0

20.0% 100.0

10.0%

0.0

0.0% 2003

2004

2005

2006

2007

RM bn

2008

2009

2010

2011E

% of GDP

SOURCES: CIMB, BNM

Critical to continued relevance of our affordability analysis are the assumptions that interest rates do not return to the 1980s/90s highs and banks’ net interest margins remain competitive. Also, our analysis does not factor in changes in consumers’ spending habits and relatively high debt, which could partly be due to funds freed up by near-peak residential affordability. As the following table shows, although loans used for the purchase of residential property have been stable at around 49% of total household loans, the percentage of loans for personal and other uses has been rising.

Figure 38: Consumer loans (RM m) Purchase of passenger cars Purchase of residential property Personal use Credit card Others Household loans Total loans Household loans/total loans

2006 98,528 162,381 23,175 19,912 28,491 332,487 593,014 56.1%

2007 102,275 174,358 26,960 22,770 31,578 357,941 644,237 55.6%

2008 109,486 192,176 31,180 24,949 34,797 392,589 726,546 54.0%

2009 114,694 210,074 37,246 26,390 42,801 431,205 783,507 55.0%

2010 123,470 237,808 42,280 30,138 55,757 489,454 883,285 55.4%

2011 131,150 268,845 50,827 32,685 69,735 553,241 1,003,517 55.1%

Purchase of passenger cars Purchase of residential property Personal use Credit card Others Household loans

29.6% 48.8% 7.0% 6.0% 8.6% 100.0%

28.6% 48.7% 7.5% 6.4% 8.8% 100.0%

27.9% 49.0% 7.9% 6.4% 8.9% 100.0%

26.6% 48.7% 8.6% 6.1% 9.9% 100.0%

25.2% 48.6% 8.6% 6.2% 11.4% 100.0%

26.0% 48.6% 9.2% 5.9% 12.6% 100.0%

SOURCES: CIMB, BNM

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PROPERTY DEVT & INVT March 5, 2012

4.2 Election risks The property sector is a high-beta play on the broader market. Should the upcoming 13th general election results turn out to be negative for sentiment and confidence, property transactions could shrink and share prices of property stocks would take a hit too. General elections have to be held no later than mid-2013 but most expect the elections to be called some time in 2012, possibly as early as mid-2012.

4.3 Double-dip risks Prospects for the residential property sector are a function of the economic and stockmarket outlook. We are forecasting a mild recession for Europe and moderate economic growth in the US in 2012. Real GDP growth in Malaysia is expected to stay in positive territory, albeit a slower 3.8% compared to 5.1% in 2011. A double-dip recession would weigh on stockmarkets and this would have knock-on effects on the property market.

4.4 Negative policies In the 2012 Budget announced in Oct last year, real property gains tax (RPGT) was raised from 5% to 10% for the first two years. In Nov 2011, the central bank announced measures to rein in household debt through new loan rules that took effect on 1 Jan 2012. These measures can be considered mild and will only have a temporary effect in cooling down speculative demand. But should the government take harsher measures to curb property price appreciation, it would have a detrimental impact on the sector.

5. VALUATION AND RECOMMENDATION 5.1 Who benefits most from rising prices?

Rising residential property prices would benefit all developers, at least in the short- to medium-term. They would be able to raise selling prices and presumably chalk up greater sales volume as rising prices are normally accompanied by rising transactions. While raw material and labour costs would probably increase in tandem, land cost is fixed. The biggest winners would be residential property specialists and those with large landbanks. Companies that develop high-rise buildings should benefit more as land cost as a percentage of total cost is considerably higher for high-rises than for landed properties.

Figure 39: Residential property transactions in Malaysia RM m

Units

60,000

250,000

50,000

200,000

Units 40,000

150,000 30,000 100,000

Sales value

20,000

50,000

10,000

0

0 19901991 19921993 19941995 19961997 19981999 200020012002 20032004 20052006 20072008 20092010

SOURCES: CIMB, PMR

19

PROPERTY DEVT & INVT March 5, 2012

Rising property prices could be a disadvantage for companies with relatively smaller landbank such as quick turnaround specialists Mah Sing and UOA Dev as they would have to pay higher prices to replenish their landbank. Mah Sing and UOA Dev operate on the manufacturing model where they have to constantly look for land which can be quickly launched and monetised. We believe that rapid house price appreciation would benefit UEM Land, SP Setia and E&O the most as they have vast landbank. SP Setia stands to gain significantly, having snapped up landbank aggressively in 2011. The GDV of its land acquisitions in 2011 alone is higher than the total GDV of Mah Sing or UOA Dev.

Figure 40: Lanbanking in FY11 Location 1 2 3 4 5 6 7 Total

Jan Jan Feb Apr Aug Sep Oct

Development type

MOH, Bangsar KL Tebrau, Johor Cyberjaya Singapore Semenyih, Selangor Melbourne, Australia Semenyih, Selangor

Res/commercial Mixed development Residential Residential Mixed development Residential Mixed development

Size (acres) 40.2 265.7 268.1 1.0 1,010.5 2.23 673.3 2,261.0

Cost (RM m) 700.0 125.8 420.4 159.0 330.1 81.0 381.3 2,197.6

Cost (RM psf) 399.55 10.87 36.00 3,650.14 7.50 833.34 13.00 22.31

GDV (RM m) 10,000 1,000 3,000 320 3,500 800 4,000 22,620

SOURCES: CIMB, SP Setia

In terms of total landbank, UEM Land is by far the largest with over 11,000 acres with GDV of RM76bn. Although SP Setia’s landbank is less than half the size of UEM Land, most of its landbank is located in the Klang Valley and its GDV is also massive at around RM60bn. Klang Valley is by far the largest property market in Malaysia and transaction value there makes up more than 50% of the country’s total. E&O’s total landbank is less than a third of SP Setia’s but the bulk of the value sits with the rights to reclaim 760 acres of prime land in Penang. We estimate the GDV of that land alone to be around RM33bn, giving the group a total GDV of close to RM40bn. Mah Sing and UOA Dev both have small landbank with GDV of RM13bn-14bn. UOA Dev has the lowest geographical diversification as all of its land is located within the Klang Valley and the bulk in Kuala Lumpur.

Figure 41: Breakdown of land bank (acres)

E&O Mah Sing SP Setia UEM Land UM Land UOA Dev Total

Kuala Lumpur 20 141 73 82 6 104 425

Selangor 310 544 3,531 535 234 10 5,164

Penang 1,146 108 43 1,297

Johor 210 514 1,177 8,321 2,272 12,494

Others 42 2,681 2,723

Overseas 542 4 546

Total 1,685 1,307 5,408 11,623 2,511 114 22,649

GDV (RM bn) 40 14 60 76 7 13 210

SOURCES: CIMB, COMPANY REPORTS

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PROPERTY DEVT & INVT March 5, 2012

Figure 42: Breakdown of residential property transaction value in Malaysia 100%

80%

60%

40%

20%

0% 1995

1996

1997

1998

1999

2000

2001

Klang Valley

2002

Johor

2003

2004

Penang

2005

2006

2007

2008

2009

2010

Others

SOURCES: CIMB, PMR

In terms of GDV to market cap, E&O has the highest ratio at 21x. This means that if residential property prices rise rapidly, E&O should be the biggest winner given its much larger impact on market cap. However, an adjustment needs to be made to this ratio as the bulk of E&O’s land bank and GDV is from Phase 2 of Seri Tanjung Pinang, for which it has yet to get final approval to reclaim 760 acres of land. United Malayan Land is also a big winner as its GDV/market cap is the second highest. As for SP Setia which has the highest ratio amongst the big caps, despite its already large size and market cap, the impact on the group is also substantial. Also, given its strong track record in execution, the group is likely to be able to take advantage of such opportunities to maximise returns.

Figure 43: GDV/market cap ratio

E&O Mah Sing SP Setia UEM Land UM Land UOA Dev

Outstanding shares (m) 1,133 832 1,848 4,325 302 1,196

Price (RM) 1.66 2.23 3.94 2.36 1.60 1.49

Market cap (RM m) 1,880.8 1,855.1 7,281.1 10,207.0 483.2 1,782.0

GDV (RM bn) 40 14 60 76 7 13

GDV/mkt cap (x) 21.3 7.5 8.2 7.4 15.1 7.0

SOURCES: CIMB, COMPANY REPORTS

5.2 Maintain Trading Buy on property sector In Jan we downgraded the property sector from overweight to Trading Buy, in line with our more cautious view on the economy and stockmarket. We also highlighted the risk of imminent general elections, the outcome of which could have a large impact on sentiment. As we know, demand for properties is largely a function of sentiment and confidence. Nonetheless, we kept most property stocks as trading buys as we believed that their fundamentals remained healthy and valuations attractive. Part of our conviction in their fundamentals came from a point that we have repeatedly stated, i.e. that there is no broad-based property bubble and that affordability, in fact, remains near its best-ever level.

This report’s detailed analysis of the demand and supply, price dynamics and income affordability of residential properties in Malaysia reinforces our views on this subject.

We make no changes to our earnings forecasts, recommendations and target prices for all property stocks under our coverage. Mah Sing remains our top pick in the sector for its strong execution track record. But the group needs to step up landbanking efforts as we expect residential property prices to continue strengthening. Historically, overall residential property prices have almost 21

PROPERTY DEVT & INVT March 5, 2012

always risen in a growing economy. It is only during recessions or economic crisis’s that overall prices have fallen. In terms of exposure to potentially strong appreciation in residential property prices, E&O would be our pick given its leveraged position to prime landbank.

We continue to like SP Setia for its aggressive management and excellent execution. The amicable working relationship between the company's entrepreneurial management and major shareholder PNB could work to the group's advantage in securing new landbank. UOA Dev will also continue to do well and its exposure to mainly high-rise developments should benefit from rising property prices. Its strength in accelerated and cost-efficient construction should help to keep pretax margins high in the 40-50% range. UEM Land will benefit from its vast landbank. Its prospects are promising given the strong potential of Nusajaya and Iskandar Malaysia. One stock not under our coverage that will benefit significantly from a focus on affordable residential properties is Hua Yang (HYB MK; Not Rated). The group has exposure to mid-priced properties in the Klang Valley, Perak and Johor.

Figure 44: Discount to RNAV and NTA

E&O Mah Sing SP Setia UEM Land UM Land UOA Dev Average

Share price RNAV/shr (Discount)/ (RM) (RM) Premium 1.66 2.53 -34.4% 2.23 2.79 -20.1% 3.94 4.30 -8.4% 2.36 2.69 -12.3% 1.60 3.42 -53.2% 1.49 2.62 -43.1% -28.6%

NTA/shr (Discount)/ (RM) Premium 1.13 46.9% 1.29 72.9% 1.88 109.6% 1.12 110.7% 3.04 -47.4% 1.51 -1.3% 48.6%

Target Upside (RM) 1.77 6.6% 2.51 12.6% 4.30 9.1% 2.56 8.5% 2.05 28.1% 1.84 23.5% 14.7%

SOURCES: CIMB, COMPANY REPORTS

Figure 45: Recommendations, basis and target prices

E&O Mah Sing SP Setia UEM Land UM Land UOA Dev Sector

Recomm endation Trading Buy Trading Buy Trading Buy Trading Buy Trading Buy Trading Buy Trading Buy

Target price (RM) 1.77 2.51 4.30 2.56 2.05 1.83

Target basis 30% discount to RNAV 10% discount to RNAV Parity with RNAV 5% discount to RNAV 40% discount to RNAV 30% discount to RNAV

SOURCES: CIMB, COMPANY REPORTS

6. FINAL WORD ON THE PROPERTY BUBBLE MYTH Many people in the finance and investment industry claim that residential property prices have shot through the roof in recent years and that a bubble is waiting to burst. While we do not dispute that prices of certain properties in certain locations have gone up very sharply in recent years and that the rentals of these properties are now so low that they cannot support the inflated capital values, we caution that we must compare apples with apples and not be misled by selected examples that do not represent the majority or the average. The average residential property is not those located in Klang Valley's Bandar Utama, Taman Tun, Bangsar, Damansara Heights, Sri Hartamas and KLCC or Penang's Gurney Drive, Seri Tanjung Pinang and Batu Ferringhi or Johor's Horizon Hills, Leisure Farms and Puteri Harbour. The average residential property is far less glamorous and includes low-cost homes, flats, apartments and terraced houses that cater to the masses. Within the average home and average household space, prices and incomes remain very favourable. We believe that the average house buyer should not hesitate to buy an average residential property as affordability has never been better. It may not stay this way forever.

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PROPERTY DEVT & INVT March 5, 2012

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Recommendation Framework #1 *

Stock OUTPERFORM: The stock's total return is expected to exceed a benchmark's total return by 5% or more over the next 12 months.

NEUTRAL: The stock's total return is expected to be within +/-5% of a benchmark's total return.

UNDERPERFORM: The stock's total return is expected to be below a benchmark's total return by 5% or more over the next 12 months.

TRADING BUY: The stock's total return is expected to exceed a benchmark's total return by 5% or more over the next 3 months.

TRADING SELL: The stock's total return is expected to be below a benchmark's total return by 5% or more over the next 3 months.

Sector relevant

OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index over the next 12 months.

NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months.

UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index over the next 12 months.

TRADING BUY: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index over the next 3 months.

TRADING SELL: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index over the next 3 months.

relevant relevant relevant relevant

* This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand and Jakarta Stock Exchange. Occasionally, it is permitte d for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.

CIMB Research Pte Ltd (Co. Reg. No. 198701620M)

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PROPERTY DEVT & INVT March 5, 2012

Recommendation Framework #2 **

Stock

Sector

OUTPERFORM: Expected positive total returns of 15% or more over the next 12 months.

OVERWEIGHT: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of +15% or better over the next 12 months.

NEUTRAL: The industry, as defined by the analyst's coverage universe, has either (i) an equal number of stocks that are expected to have total returns of +15% (or better) or -15% (or worse), or (ii) stocks that are predominantly expected to have total returns that will range from +15% to -15%; both over the next 12 months.

UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of -15% or worse over the next 12 months.

TRADING BUY: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of +15% or better over the next 3 months.

TRADING SELL: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of -15% or worse over the next 3 months.

NEUTRAL: Expected total returns of between -15% and +15% over the next 12 months.

UNDERPERFORM: Expected negative total returns of 15% or more over the next 12 months.

TRADING BUY: Expected positive total returns of 15% or more over the next 3 months.

TRADING SELL: Expected negative total returns of 15% or more over the next 3 months.

** This framework only applies to stocks listed on the Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (IOD) in 2011.

ADVANC - Excellent, AMATA - Very Good, AOT - Excellent, AP - Very Good, BANPU - Excellent , BAY - Excellent , BBL - Excellent, BCP - Excellent, BEC - Very Good, BECL Very Good, BGH - not available, BH - Very Good, BIGC - Very Good, BTS - Very Good, CCET - Good, CK - Very Good, CPALL - Very Good, CPF - Very Good, CPN - Excellent, DELTA - Very Good, DTAC - Very Good, GLOBAL - not available, GLOW - Very Good, HANA - Very Good, HEMRAJ - Excellent, HMPRO - Very Good, ITD - Good, IVL - Very Good, KBANK - Excellent, KTB - Excellent, LH - Very Good, LPN - Excellent, MAJOR - Very Good, MCOT - Excellent, MINT - Very Good, PS - Excellent, PSL - Excellent, PTT Excellent, PTTGC - not available, PTTEP - Excellent, QH - Excellent, RATCH - Excellent, ROBINS - Excellent, SCB - Excellent, SCC - Excellent, SCCC - Very Good, SIRI - Very Good, SPALI - Very Good, STA - Very Good, STEC - Very Good, TCAP - Very Good, THAI - Very Good, TISCO - Excellent, TMB - Excellent, TOP - Excellent, TRUE - Very Good, TUF - Very Good:

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