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Feb 22, 2017 11:14:25

Property: Real Estate - Towards a More Positive 2017

The majority of companies we spoke with have expressed more positive views for 2017, as evident in the 34% YoY growth in targeted aggregate marketing sales to IDR31.6trn. This supports our OVERWEIGHT view on the sector for 2017, where the companies’ aggregate presales target is in line with our presales target of IDR31.7trn. Indonesian developers under our coverage booked an aggregate 15% YoY decline in marketing sales in 2016, due to weaker macroeconomic conditions and uncertainties prior to the implementation of the tax amnesty programme.

  • Political factors may impact presales in 1H17. The current nationwide governers’ elections may lead to soft presales in 1H17 in our view, as developers are unlikely to launch large projects due to political uncertainty (assuming two rounds of elections). We may see more project launches starting early 2H17 after the end of the elections. Other factors that may delay property launches include the Government’s plan to tax idle land, although this is still in discussions and we believe the companies’ confidence levels remain intact despite this issue.
     
  • 2016 performance review. We believe that the drop in 2016 marketing sales was due to several factors such as weakening macroeconomic conditions (4Q16 GDP at 4.9% vs 5.2% in 2Q16), the Government’s aggressive taxation drive, concerns on IDR stability, and uncertainty prior to the execution of the tax amnesty programme during 1H16.
     
  • Catalysts in place, ready for realisation. Throughout 2016, several positive drivers were launched in the sector including:
    i. Foreigners being allowed to purchase property under “rights to use” title;
    ii. Relaxation of loan-to-value (LTV) threshold;
    iii. “Off-plan” properties being allowed for second mortgages;
    iv. Reduction in final sales tax to 2.5%;
    v. Lower mortgage rates due to the declining Bank Indonesia (BI) rate.

    We believe that the impact from these catalysts were not fully translated into 2016 presales due to several events and the realisation of aforementioned risks. Nevertheless, we see limited downside given that the sector underperformed JCI by 8.5% as at the end of Dec 2016, reflecting investors’ concerns over the sector. Going forward we believe these uncertainties should clear with the above positive catalysts in place.
     
  • Increasing demand for mortgages. Based on data points (Figure 3) we see a shift in payment method from cash instalments to mortgages, as a result of the declining BI rate in 2016, as well as relaxation of the LTV threshold. We expect this trend to continue as mortgage rates are getting more competitive in the single-digit range (Figure 4). We are still of the view that BI would cut rates by another 25bps going forward.
     
  • Attractive valuations. The sector is currently trading at a 64% discount to RNAV, around -1.6SD from its past 3-year mean of 56%. We continue to favour companies with healthy balance sheets and sufficient landbank, as landed houses remain the most popular type of property to buy. Our Top Pick is Bumi Serpong Damai ($BSDE), which currently trades at a 64% discount to its RNAV, and is supported by a huge landbank totalling 4,092ha, a low net gearing level of 0.1x, and FY17F earnings growth of 20% YoY. (Yualdo Tirtakencana Yudoprawiro)

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