Indonesia Property Sector: Modest Improvement in Outlook
Stay Selective – Focus on Quality Property Names In this paper, we provide an update on the Indonesia property sector and highlight the top recommendations in our coverage. Conditions have improved since our sector update in October 2015 – the rupiah has stabilised, consumer confidence has recovered from a 3Q15 trough, and mortgage rates are declining. Developers are guiding cautiously for 2016 presales (+9% YoY) and physical property price gains remain subdued but we expect further gradual improvement in the outlook for the sector over the coming months. We recommend accumulating selected property names in stages with a 12-month view, staying focused on quality developers with long operating histories, strong balance sheets and solid execution records.
We remain positive on developers with large exposure and landbanks in Greater Jakarta, despite a temporary softening in property prices there, as we expect it to remain Indonesia’s main economic hub for the foreseeable future. We believe that rising incomes, ongoing urbanisation and further improvements in infrastructure such as the high-speed rail, MRT and LRT projects will continue to drive long term demand for quality residential and commercial property in the area. Potential short term catalysts for the developers under our coverage are better than expected presales in 1H16, stronger economic growth, and further regulatory changes that are supportive of the property sector, such as allowing mortgage financing for second homes that are still under construction.
Our top pick is Bumi Serpong Damai
), Indonesia’s biggest property developer by market cap and landbank. BSDE has the strongest balance sheet among the developers in our coverage, with net gearing of just 6% at end-3Q15. Current valuations are attractive at more than one standard deviation below its 5-year average PB and PE, given its vast, low cost landbank centred on BSD City in Greater Jakarta, and wide product range, which gives it flexibility to vary its product mix in response to changes in demand or regulations affecting a particular segment. We think the company is in an excellent position to ride a recovery in property demand as buyer sentiment improves and the macro environment turns more supportive.
We also like Lippo Karawaci
) for its diversified property portfolio within Greater Jakarta and new projects in Makassar, as well as its market-leading Siloam private hospital business. Its shares sold off in early December following a weak 3Q15 earnings report and a cut in its FY15 presales guidance but we think the correction is overdone and we believe the longer term outlook for LPKR remains positive, given its large Greater Jakarta footprint and exposure to healthcare.
We also continue to favour Pakuwon Jati
) for its large recurring revenue contribution from a high-quality mall portfolio in Jakarta and Surabaya; we expect revenue support from rental increases this year as 21% of its mall leases are up for renewal.