The cut in OPR supports our view of improving consumer sentiment in 2H16, which could lead to property sales recovering sooner than later.
KUALA LUMPUR: CIMB Equities Research remains Overweight on the property sector after Bank Negara Malaysia (BNM) announced it was lowering the Overnight Policy Rate (OPR) by 25bp to 3%.
It said on Thursday developers are undervalued and there is still upside to property share prices, supported by the recovery in property sales. The property sector is trading at 0.8 times price-to-book value (P/BV) at 30% discount to its 10-year average of 1.16 times.
“Although the KL Property Index has inched up 3% post-OPR cut, we believe there is still upside to property share prices, supported by the catalyst of recovery in property sales. Eco World remains our sector top pick. A sudden economic shock is the key downside risk to our sector call,” it said.
Following the cut in OPR, it said banks would be lowering their base rates and base lending rates. Every 25bp reduction in borrowing rate would reduce the monthly instalment for a 30-year mortgage loan by 3%. Homebuyers’ purchasing power would rise by similar quantum.
CIMB Research said a 25bp reduction in borrowing rates could increase consumers’ disposable income due to reduction in interest payments. This is likely to have some positive impact on consumer sentiment.
The interest in housing purchase has fallen since 3Q14 in tandem with consumer sentiment. A recovery in consumer sentiment could boost homebuyers’ confidence and lead to higher demand for property.
The research house said when it upgraded the property sector from Hold to Overweight in February 2016, it expected property sales in 2H16 to be better half-on-half due to gradual recovery in consumer sentiment from subsiding effects of political uncertainty, shock from the weak ringgit and low crude oil prices in 2015.
“The cut in OPR supports our view of improving consumer sentiment in 2H16, which could lead to property sales recovering sooner than later.
“Some may argue that the lower OPR would not cause banks to ease lending standards, citing 5M16 housing loan approval rate of only c.40%. However, the low loan approval rate of c.40% was computed based on the value of loans approved divided by value of loans applied.
“According to the Association of Banks in Malaysia, the loan approval rate in 2M16 would be c.80% if calculated based on the number of applications, rather than value,” said CIMB Research.
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