London Property - The evergreen market

We recently conducted a London Property Study trip, which included site visits to Battersea Power Station (BPS) (SPSETIA, SIME DARBY, EPF JV) and Royal Mint Street by IJM Land. We also engaged Jones Lang LaSalle (JLL) to get an overview of London’s office and residential market outlook, development  planning and regeneration opportunities.  Overall, we came away feeling POSITIVE on London’s property scene. London’s has bucked UK’s bearish trend given the world’s affinity to London and well sought after educational offerings. Record low levels of the Sterling Pound (GBP), which was last seen prior to the Asian Financial Crisis (AFC), has also lured overseas investors like our own Malaysian developers and institutional funds.  The city is also viewed as a ‘flight to safety’ destination for the  wealth of countries seeking safe havens (e.g. Greece, the Middle East) or just new avenues to divest new found wealth, particularly seen from emerging markets like China, India and Russia. Locally, lending environment is tight which prices-out many locals,  while developers are finding it tough to raise financing for landbanking or to kick-off new launches. In a backdrop of low vacancy rates in the residential and office (Prime/Grade A) space, thinning incoming supply will push capital values up, which  is an attractive value proposition for overseas investors.

We opine the recent investments made by Malaysian developers are largely driven by the need to divest their earnings base overseas as the Malaysian property market can no longer offer larger listed developers, with high base sales, the double-digit sales growth required by shareholders. Although the development landscape in the UK, particularly Central London, can be challenging in terms of approvals, public and local authorities perception of the project and infrastructure requirements (transportation, public realms), the shortage of both residential space, low residential vacancy rates, increasing rental market and lack of Grade A commercial buildings are sufficient reasons to overcome the said challenges, at least for the next few years. We do expect to see more Malaysian developers and investment companies making a bee-line for London. Maintain; 1) OUTPERFORM on IJMLAND (TP: RM2.60) due to its net cash position, catalytic projects like Rimbayu and Sebana Cove, potential new overseas ventures and its high proportion of affordable products; 2) MARKET PERFORM on SPSETIA (TP: RM3.80) because its stock liquidity issues will cap positive reactions from news flows such as commencement of Battersea, other sizeable projects like its China’s G2G industrial development/MoH land swap and potential new ventures/landbanking. Our sector call on developers is NEUTRAL given the tightening of real-estate policies observed, plus the lack of immediate term property catalysts in Malaysia; 3) MARKET PERFORM on SIME DARBY (TP: RM9.80) because on near term CPO prices weakness and slowdown in industrial division which may result in flat FY13E earnings growth, while long-term growth prospects are intact.   

Source: Kenanga