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PP10551/10/2009(022563)

03 September 2010

MALAYSIA EQUITY
Investment Research
Daily News
Sector Update
Mervin Chow Yan Hoong
+60 (3) 9207 7668
mervin.chow@my.oskgroup.com Property
A Brewing Real Estate Mania

OVERWEIGHT  Demography will drive Malaysia’s Biggest 
Residential Real Estate Boom since the 
Asian Financial Crisis  

Long-wave real estate trends are clearly driven by demographics, which are
instrumental in prompting a revamp to long-term investment strategies. As we believe
we are currently at the locus of another major turning point in the long-wave real estate
trend, we examine in detail, using demographic analysis, when and which real estate
segment is likely to be hot (and which won’t be) for the next decade. ‘Location’ is
always cited as key to identifying real estate opportunities but what is equally
important but often overlooked is ‘timing’. We believe we are seeing the beginning of
what would perhaps be Malaysia’s biggest residential real estate boom in more than a
decade with key insights being:

 A major mass housing boom will likely occur in the first half of this decade;
 We are in the early stage of a property ‘super cycle’ led mainly by mid-to-high end
landed properties which may peak sometime in 2012/13 and followed by a potential
slump;

 The current 20-year secular boom in mid-to-high end residential properties since
the early 1990s may peak in 2012/13, after which mass affordable housing could
dominate the real estate theme until circa 2015/16;
 Stocks with focus in the mid-to-high end segment (e.g. Sunrise, YNH Prop, IGB
Corp and BRDB) are your best bets for the next 12 months prior to the 2012/13
potential peak. Mass housing developers, especially the ‘fallen angles’ such as LBS
Bina and MK Land may come to the fore as another major investment theme after
that. For “best-of-all-worlds’’ exposure during this period, BUY SP Setia.
Although the expected peak in 2012/13 may be followed by a slump, the phenomenal
boom that immediately precedes it gives investors an excellent opportunity to profit
from the trend, at least for the next 12 months. We therefore seize this opportunity to
upgrade our property sector call to OVERWEIGHT from Neutral.

OSK Research | See important disclosures at the end of this report 1


OSK Research

TABLE OF CONTENT

Abstract Page

FOREWORD ........................................................................................................................................................... 3

PROLOGUE: DEMOGRAPHIC WAVE AND THE REAL ESTATE LONG WAVE BOOM-BUST CYCLES .......... 4

CHAPTER 1: THE COMING MASS HOUSING BOOM........................................................................................ 10

CHAPTER 2: HIGH-END PROPERTIES ENTERING FINAL PHASE OF LONG WAVE BOOM ........................ 14

CHAPTER 3: SOWING THE SEEDS OF THE NEXT MANIA .............................................................................. 27

CHAPTER 4: HOW YOU SHOULD INVEST IN THE NEXT MANIA .................................................................... 36

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See important disclosures at the end of this report


OSK Research
FOREWORD

TERRACE HOUSES SOLD FOR RM1M! BUYERS CAMP FOR 10 NIGHTS TO BUY A NEW HOUSE!
HOMES BECOMING TOO COSTLY FOR THE AVERAGE MALAYSIAN! These are just some of the
headlines that in no small way reflect a recent real estate phenomenon characterised by spiraling
property prices and Malaysians’ thirst for newly launched houses. The aim of this report is to help
investors understand the real estate environment we are living in, what is likely to happen in the future
and how to profit from this ever-dynamic real estate sector.

The age of great volatility. Investors should recognise that there is a linked sequence of events that has led
us to where we are today. The 1950s’ Baby Boomers have become more risk averse in their investments since
2003/04. As they approach retirement, they would divert a significant portion of their wealth into savings and
traditionally perceived defensive asset classes such as real estate. As a result, the banks have been sitting on
massive amounts of liquidity and have since been progressively loosening their credit expansion by lending
generously to these baby boomers. Consequently, the collusion between demography and the banks has
created a period of increased volatility in the real estate market in recent years by nurturing a ‘culture’ of
speculation in the real sector. This helps to explain why the 2003/04 mass housing boom barely lasted for 2
years and how its swift collapse became the prelude to the 2007/08 high-end condos boom when liquidity was
forced to seek a new home. The high-end condos boom, however, also did not last long and in the aftermath of
its implosion in 2009, the system is still flush with liquidity. This money still needs to find a home and it can find
no better abode today than the mid-to-high end landed properties, the last remaining residential asset class
that has yet to experience a bubble since the Asian Financial Crisis.

A brewing real estate mania. Currently, the advent of the 1970s subtle baby boomers into the market in
search of trade-up homes has coincided with the 1950s Baby Boomers who are still eagerly in search of real
estate investment opportunities. With the twin demand coming from two groups of baby boomers, the coming
boom in mid-to-high end residential properties, particularly landed ones, will turn out to be more than an
ordinary upcycle. As has been demonstrated recently, banks will certainly be more than eager to fund and fuel
the boom by encouraging the community and the financial system to leverage further and shift away from
traditional financing to more speculative financing. Hence, euphoria may develop as a result.

2012, the year to watch out. As the euphoria grows, there is a risk that the use of speculative financing would
become so widespread that the only way for the system to stay afloat is for property prices to keep going up
similar to the recent subprime situation in the US. Alas, the constraints of demography imply that the demand
mania may not be sustained post year 2012/13, thus restraining the upward trajectory in property prices. Then
the entire financial system would become vulnerable to a collapse at the smallest trigger, such as the
borrowers’ inability to honour their monthly mortgage obligations as the first large batch of deferred payment
schemes begins to expire commencing 2011/12. Therefore, these dates strongly suggest that year 2012, or
latest 2013, may mark the peak of what would perhaps be the country’s biggest residential real estate boom
since the Asian Financial Crisis.

Upgrade to OVERWEIGHT (from Neutral). Despite the potential gloom post 2012/13, the phenomenal boom
that immediately precedes it gives investors an excellent opportunity to profit from the trend. The winners in
this phenomenal upcycle between 2009/10 and 2012/13 are clearly the mid-to-high end developers. However,
their current valuations do not appear to be reflecting this as yet. We are upgrading the target prices of all mid-
to-high end residential property developers under our coverage based on a higher P/NTA ratio assumption,
while leaving our earnings forecasts unchanged for now. Since the mid-to-high end landed properties will likely
to be the top performers of the sector, we value their potential P/NTA during this period based on 2.5σ above
their respective historical mean, closer to the peak valuation they were trading at during the 2007 upcycle.
Other developers with general exposure to the development of mid-to-high end residential properties have their
P/NTA conservatively valued at about 1.5σ above their respective historical mean instead.
Stock Price Target Old TP Mkt Cap Volume P/NTA (x) FY0 FY1 Rel. Performance % Rating
RM RM RM RMm ‘000 FY1 FY2 ROE % DY % 1-mth 3-mth 12mth
SP Setia 4.40 6.31 3.59 4473.9 1009.3 2.1 2.0 18.0 3.6 -1.3 -0.4 -18.9 Buy 
IGB Corp. 1.81 2.41 1.94 2697.4 860.9 0.9 0.9 6.3 1.4 -8.4 -5.2 -18.5 Buy 
Sunrise 2.00 4.62 2.28 990.8 346.8 0.9 0.8 7.3 2.8 -8.6 -5.3 -21.3 Buy 
YNH Prop. 1.68 3.03 1.83 681.0 219.6 0.9 0.8 7.7 4.2 -4.3 0.3 -24.3 Buy 
Bandar Raya 2.24 3.06 1.87 1074.7 511.8 0.6 0.6 5.7 3.3 3.9 28.0 21.8 Buy 
Plenitude 3.61 4.84 4.00 487.4 69.4 0.6 0.5 8.5 4.7 -9.9 10.2 7.2 Buy 
Hunza Prop. 1.39 2.88 1.54 270.2 105.1 0.6 0.6 12.8 5.4 -0.4 -2.7 -8.0 Buy 
Glomac 1.40 1.82 1.82 416.0 187.3 0.7 0.7 8.7 6.4 -9.9 -1.6 14.2 Buy 

OSK Research | See important disclosures at the end of this report 3

See important disclosures at the end of this report


OSK Research
PROLOGUE: DEMOGRAPHIC WAVE AND THE REAL ESTATE LONG WAVE BOOM-
BUST CYCLES

In trying to identify the Trends and Timing of Real Estate Cycles, we discovered that long-term property
trends are clearly driven by the Demographic Wave. The Demographic Wave is a study of the changes
in a population’s demography; changes which are, we believe, largely responsible in shifting society’s
aggregate demand and preference for properties. This shift thus creates wave-like volatility over time in
the long-term property trend. It helps us understand why and when a particular real estate sub-segment
will rise or fall, despite all known odds pointing to the contrary.

THE QUEST FOR ANSWERS

More than meets the eye. In late 2002, despite suffering from the contagion effects from the US dotcom bust,
the 9/11 terrorist attacks on the US, the Afghanistan and Iraq wars, and the SARS outbreak, the real estate
market began to show signs of life after years of uncertainties. It first began with the sudden re-emergence of
mass housing boom commencing late 2002. The boom, however, was brief as it came to an abrupt end by late
2004 when demand suddenly collapsed, leading to a massive overhang of affordable houses for the
subsequent years. 6 years have passed since the late 2004 peak and the mass housing market is still in the
doldrums. What brought the mass housing market to its knees, we believe, cannot be largely blamed on
spiraling inflation, prospects of an interest rate hike or a gloomy economic outlook during that period. This is
because such arguments would contradict the fact that the mass housing market still managed, despite all the
odds, to spring to life with vigour in 2003. Furthermore, these arguments do not adequately explain how,
despite the strong economic rebound and string of measures and incentives provided by the Government and
the private sector since the peak in late 2004, demand for mass housings remains benign to this day. What
then drove the rally in 2003? Has there been a larger force which ensures that the mass housing market would
remain in a recessionary phase for 6 long years?

Turning the clock further back. If we were to turn the clock back further, we would find many similarly
intriguing examples. For instance, how did townships such as Subang Jaya, USJ, Bandar Sunway and
Puchong explode into bustling towns from almost nothing in a matter of a decade? Even as each launch of
houses was by the hundreds during the 1980s and early 1990s, how was it possible that most were snapped
up almost immediately? Come early and mid-1990, however, why did the trend come to an abrupt end, only to
be immediately replaced by a strong speculative trend in real estate? From where did this huge buying force
come and where did it go? After more than a decade, why have developers not been able to repeat the robust
performance they achieved during the 1980s and early 1990s today?

Property trends move in cycles. Our discussion so far has demonstrated that property trends cannot remain
at their current trajectory forever and as a result, this can create wave-like volatility in long-term property trends
over time. Inspired by the works of Nikolai Kondratieff, a Russian economist during the 1920s who introduced
the so-called Kondratieff Wave, we began to turn to the possibilities of cycles for answers. We believe that
what may appear to be random movements are in fact seasonally movements and are in tune with the cycles
that govern long-term property trends. ‘Timing’ is, therefore, a very crucial factor in identifying real estate
investment opportunities.

Rise of the Demographic Wave theory. In our analysis, we discovered that long-term property trends are
clearly driven by the Demographic Wave. The Demographic Wave is a study of the changes in a population’s
demography – changes which are, we believe, largely responsible in shifting society’s aggregate demand
patterns and preference for properties, thus creating wave-like volatility over time in the long-term property
trend. It also tells us why and when a particular sub-segment of real estate will rise and fall, irrespective of the
known odds pointing to the contrary.

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See important disclosures at the end of this report


OSK Research
INTRODUCTION TO DEMOGRAPHIC WAVE THEORY

It’s about people! The Demographic Wave theory seeks to find answers to how the changes in the
population’s demographic landscape can be largely responsible in shifting society’s aggregate demand pattern
and preference for properties. The backbone to using the Demographic Wave theory to forecast long-term
property trends is based primarily on the recognition that, firstly, property-buying patterns do change at different
stages of a person’s life as he/she ages. Secondly, there is a period of accelerating momentum in birth rates
(‘baby booms’) and decelerating momentum in birth rates (known as ‘baby busts’). Hence, the ageing ‘baby
boomers’, by the sheer force of their numbers, can create a force that is significant enough to shift society’s
preference for properties. In other words, when a baby boomer moves from a particular life stage to another,
this can result in a slowdown, or a bust, in a particular real estate sub-segment, and a boom in another.

Figure 1.1: A depiction of how accelerating and decelerating momentum in birth rates can create
a wave-like volatility in the demographic landscape over time

Source: OSK Research, U.S. Census Bureau

THE PREDICTABILITY OF PROPERTY BUYING PATTERNS

Predictable property buying patterns at different life stages. As we go through different stages of life, the
kind of property we want and need – from the small apartment/house we rent/buy during the early years of our
working life to the starter homes we buy when we decide to start a family, and to the bigger houses we may
want to upgrade to in the later part of our life – can be rather predictable. Life priorities change according to
one’s life stage. As a simple analogy, say if you gave a fresh graduate a bag of money, he/she would likely use
it to buy a new sports car, get married and/or travel around the world. If the same bag of money was given to a
middle-aged man, he would more likely to save it for retirement. The more investment-savvy ones would
probably buy a property for passive income and/or as an inheritance for his children/grandchildren later. Such a
predictable trend can be divided into 4 distinct stages of a person’s life (see Figure 1.2).

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See important disclosures at the end of this report


OSK Research
Figure 1.2: Predictable property buying patterns at different ages and stages of life in Malaysia
Type Of Property
Typical Age Typically In Demand
Life Stage Indication (Based On Life Stage) Remarks
1 Birth to late Renting properties (no A young adult who has just graduated from college/university and is
20s significant buying entering the workforce will still likely be staying with their parents for
Fresh into the activities yet) a few more years. Those who work away from home are likely to be
workforce; most do
not as yet have the renting an affordable property instead. As they build their own
financial capacity to careers for some years and with enough savings, he/she may then
buy a property be able to buy a small affordable property for him/herself, especially
if the property can be rented out later to at least cover part of their
mortgage payments.

2 Early 30s to Starter homes (mass-to- As they continue to age and attain financial and career stability,
late 30s mid housings)
most will likely be looking to get married, start a family and buy a
Aggressive house. At this stage, staying with parents or living in a small
household formation
begins; buying a affordable apartment/house may no longer be feasible, especially
starter home is when the couple begins to have children. As such, especially given
essential to house the prospect of a double income in a family and decent savings,
new nuclear family
these young couples will be looking to upgrade and buy a starter
home, usually affordable houses, to build their new nuclear family.

3 Early 40s to Trade-up homes (mid-to- In the coming years, as they enter the most productive age of life,
late 40s high end housings)
growth in wealth and income begin to accelerate more rapidly. At
At the most this point, with sufficient wealth built over the years, plus confidence
productive age of
life; likely looking to in their income and improving career prospects, most will be looking
upgrade their homes for trade-up homes to house their families. Coupled with the
to higher-end need/desire to further provide for the family, especially to finance
properties; risk
their kids’ growing expenses (as they enter schools) and future
appetite is at the
highest (higher) education, most will be driven by the desire to invest in
high-return asset classes, including speculating in real estate, with
high tolerance to risk.

4 Early 50s and Investment properties The saying that ‘Asians love properties’ is particularly true for many
upwards (mid-to-high end
properties) and vacation Malaysians who are in their fourth life stage. They would have built
Looking ahead for homes up a substantial wealth portfolio and their children may likely have
retirement; risk
averse; prefer safer completed their university education or have already started
asset classes such working. A significant retirement nest egg would have been
as investment established or the children do not need as much financial support. At
properties that can
the eve of retirement, they are naturally quite risk averse. They
yield a long-term
stable & decent begin to accumulate real assets perceived as safe haven such as
return properties (with the objective of getting additional income, security of
a stable cash flow upon retirement or as inheritance for their
children) over other more volatile asset classes such as the stock
market. Naturally, people in this life stage may own multiple
properties.

Source: OSK Research

Predictability of property buying patterns via income analysis. In addition to the changing wants and
needs, our financial capacity to attain these also changes as we enter a different life stage. This is hardly
surprising since we accumulate experience as we age, and gain trust in the workplace and proficiency in our
professions, which enable us to climb the corporate ladder and command higher incomes until we retire. Higher
income translates into higher purchasing power and therefore the ability to buy bigger houses in the later life
stages. To see whether that is the case for Malaysia, we conducted a test on the data we harvested from more
than 200 respondents during our consumer surveys in 2008 and 2009. Our findings are interesting as they
indicate that Malaysians’ income levels do change in a predictable manner as they enter different life stages
(see Figure 1.3) and are therefore highly capable in influencing property-buying patterns. A Malaysian typically
moves from renting an affordable property to buying an affordable house, in order to construct their new
nuclear family, before moving on to trade-up homes as confidence in their income and career prospects grow.
Pre-retirement, with sufficient wealth built over the years, he/she may become an active real estate investor.

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See important disclosures at the end of this report


OSK Research
Figure 1.3: Individual monthly income by age groups in Malaysia, based on OSK Research’s
Consumer Survey conducted in year 2008 and 2009 in Klang Valley and Penang

Age > 50:


Life Stage
4

Age 36-50:
Life Stage
3

Age 26-35:
Life Stage
2

Age 18-25:
Life Stage
1

0% 10% 20% 30% 40% 50% 60% 70% 80%

High Income (>RM10,000) Mid-high Income (RM5,000-10,000)


Mid Income (RM2,001-5,000) Low Income (<RM2,000)
Source: OSK Research, OSK’s Consumer Survey in Klang Valley and Penang (2008, 2009)

THE BABY BOOMERS

The ‘baby booms and busts’. Had the annual birth rates remained constant (i.e. zero or flattish growth), there
would have been limited volatility in the property cycle (assuming a perfect, efficient market where supply
matches demand). This is because when a particular age group moves on to a different life stage, the incoming
age group of approximate similar size will promptly replace the former. In such a scenario, the shift in the
market’s preference for properties will therefore be less exaggerated. However, birth rates are never constant
and there have indeed been periods of ‘baby booms’ and ‘baby busts’ in Malaysia (see Figure 1.4):

 The 1950s Baby Boomers. Among the baby boomers, the 1950s Baby Boomers (identified
as Wave 1 in Figure 1.4) are probably the most distinctive. They are the children to the
generation of World War II survivors and the pioneers who fought for the country’s
independence and formation of Malaysia as a nation. The 1950s Baby Boomers came into
existence as a result of sustained high number of births at rapid rates which lasted for about a
decade between early 1950s to early 1960s. They are the largest living demographic cohort of
society because, clearly, no other age group has at any time managed to experience such
sustainable high growth rates in number of births for such a prolonged period. By the sheer
force of numbers, the 1950s Baby Boomers have had a profound impact on the dynamics of
the real estate market over the last 60 years and will continue to do so for the coming years.
Following the 1950s Baby Boom, Malaysia experienced a ‘baby bust’ when births slowed
dramatically before reaching a temporary bottom in 1969. Births began to decelerate again in
mid-1970s and bottomed in late 1970s.
 The 1980s Echo Boomers. The 1980s Echo Boomers (identified as Wave II in Figure 1.4)
came into existence as children of the 1950s Baby Boomers, a result of the latter’s aggressive
new household formation in their late 20s and early 30s during the 1980s. The trend toward
smaller families in the late 20th century and the fact that the boom only lasted for half a
decade, however, meant that the 1980s Echo Boomers are only the second largest living
demographic cohort (hence the term ‘echo boomers’). Having said that, their numbers are not
far off from the original boomers and as such, the 1980s Echo Boomers can still be a force
that is significant enough to influence the dynamics of the real estate market. Following the
1980s Echo Boomers, Malaysia experienced a sharp but short ‘baby bust’, which quickly
reached a temporary bottom in a mere 5 years.

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See important disclosures at the end of this report


OSK Research
Figure 1.4: Year-over-year percentage change in birth rates in Malaysia. Figure highlights the
existence of the 1950s Baby Boomers (Wave I), 1980s Echo Boomers (Wave II) and more subtle
boomers (Wave ‘a’ and ‘b’) in Malaysia post World War II.

Notes: Grey areas highlight periods of baby booms

Source: OSK Research, U.S. Census Bureau

 Other more subtle ‘baby boomers’. In addition to the two major ‘baby booms’ identified
above, Malaysia also experienced some more subtle ‘baby booms’ since the 1950s, identified
as Waves (a) and (b) in Figure 1.4. Obviously, given their much weaker acceleration in births
compared to the 1950s Baby Boomers and the 1980s Echo Boomers, their impact on the
dynamics of the real estate market is generally less pronounced vis-à-vis the latter two.

INTERPRETING A PEAK IN DEMOGRAPHIC WAVE

What does a peak mean? The Birth Wave (see Figure 1.4) highlights that the growth in birth rates has been in
positive territory most of the time, implying that birth rates have increased almost every year. Hence, one may
conclude that follow through demand for properties should increase every year and may therefore invest in a
property at any time (the ‘anytime-is-a-good-buy’ mantra). This is a very dangerous conclusion to make
because although birth rates have been increasing every year much of the time, they occur at different
momentum. For example, if the CAGR for demand in affordable houses fell from 10% to 5% over the long term
(i.e. because some baby boomers moved on to upgrade to high-end properties) but the CAGR for the incoming
supply of properties was at 10%, there would be indigestion, leading to fall in rental and prices of affordable
homes. As supply usually lags demand by at least 2-3 years, changes in the macro environment during the
time lag, such as the population’s aggregate preference (as baby boomers move on to next life stage) as well
as inflation, interest rates and economic fortunes may render what was initially deemed the right quantum of
supply, too much. Further complication arises when developers, who usually reap remarkable returns early in
the upcycle, tend to get carried away and over-build. When this new supply floods the market, especially at a
time when demand is weak, the sector may tip into a downcycle. Therefore, in reality, each peak of the
Demographic Wave will almost certainly result in a recession phase given the inefficient nature of the market.

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See important disclosures at the end of this report


OSK Research
THE AGENDA FOR THE REST OF THE REPORT

Key summary insights. As we believe we are at the locus of another major turning point in the long-wave real
estate trend, the rest of this report will examine in detail why, how and when we think certain sub-segments of
the property market will rise and fall, based primarily on the Demographic Wave principles. The following are
the key summary insights to the rest of the report:

 A major mass housing boom may occur during the first half of this decade;

 We are in the early stage of a property ‘super cycle’, to be led mainly by mid-to-high end
landed properties, and will peak sometime in 2012/13, but may be followed by a slump;
 The current 20-year secular boom in mid-to-high end residential properties since the early
1990s may peak in 2012/13, after which mass affordable housing could dominate the real
estate theme until circa 2015/16;

 Stocks with focus in the mid-to-high end segment (e.g. Sunrise, YNH Prop., IGB Corp. and
BRDB) are your best bets prior to the year 2012/13 peak. Mass housing developers,
especially the ‘fallen angles’ such as LBS Bina and MK Land, may spring up as a major
investment theme early in the next decade. For the best-of-all-worlds exposure, BUY SP
Setia.

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See important disclosures at the end of this report


OSK Research
CHAPTER 1: THE COMING MASS HOUSING BOOM

Based on the Demographic Wave theory, this chapter examines why we think the country is set to see
its next major boom in the mass housing market commencing soon, before peaking around year 2015.
Mass housing will likely overtake mid-to-high end residential properties as the main real estate theme
(after the latter’s peak in 2012/13, as will be explored further in the next chapter) until year 2015. We
also look at how the earlier cohort of ‘baby boomers’ influenced the mass housing boom-bust cycle in
the past. Our conclusion, using the Demographic Wave theory, explains how certain mega townships
such as USJ, Bandar Sunway and Puchong, commencing all at about the same time in late 1980s,
turned into bustling towns from almost nothing in a matter of a decade. It also explains why the mass
st
housing market boomed very early in the 21 century, peaked in circa year 2004 and is still in the
doldrums today even after 6 years.

NEW HOUSEHOLD FORMATION & THE COMING MAJOR MASS HOUSING BOOM

The 1980s Echo Boomers march into new household formation. The prime factor that influences the long-
term boom-bust cycle of mass housings is the population’s rapidness in forming new families, which in turn is a
function of demography. The 1980s Echo Boomers are due to enter their early 30s, or Life Stage 2, soon (see
Figure 2.1), thus providing a catalyst for a major mass housing boom commencing approximately year 2011.
The boom will peak around 2015, however, when the last batch of the 1980s Echo Boomers is expected to
enter their prime age of buying starter homes. The last time a major mass housing boom occurred was during
the 1980s, which lasted until early 1990s. During the interceding years since the peak in early 1990s and now,
there was also a mild mass housing boom, which began immediately after the Asian Financial Crisis and
peaked in mid-2000s.

Figure 2.1: Year-over-year percentage change in population entering into age 30-34, the prime
age for new household formation in Malaysia

Notes: Grey areas highlight periods and potential periods of booms in new household formation

Source: OSK Research, U.S. Census Bureau

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OSK Research
THE 1980s MEGA TOWNSHIPS

A walk down memory lane. To appreciate what is in store for the mass housing market early next decade
when the rapid new household formation is due to take place, we reckon it would be interesting to shed some
light on how the earlier cohort of baby boomers influenced the mass housing boom-bust cycle in the past.

The 1950s Baby Boomers and the advent of 1980s mega townships. The mid-1980s to very early 1990s
was a remarkable period for the mass housing market, which was a period marked by flourishing mega
townships. Of the thousands of houses from each of the township launched annually, almost all were snapped
up immediately, a phenomenon that, unfortunately, is not repeated today. What was more remarkable was that
most of these mega townships, when they were first launched, were located in the middle of nowhere (e.g.
Puchong). For these developers to make such bold moves meant that they were highly confident that they
were able to capitalise on the thirst for homes and the rapid rise in demand for mass housings at that time.
What fuelled the demand was the fact that the 1950s Baby Boomers were then entering their prime age for
new household formation (see Figure 2.2), and were seeking affordable houses for their new nuclear family.
Given the sheer population of these baby boomers, the demand wave for affordable houses during the period
was indeed phenomenal. It is therefore not surprising that these townships mushroomed into bustling towns
from almost nothing in the span of just a decade.

Figure 2.2: Launches of mega townships in Klang Valley were highly concentrated during/around
periods of supposed robust new household formation in Malaysia as ‘baby boomers’ entered the
age of 30-34

Source: OSK Research, U.S. Census Bureau, Companies’ data

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See important disclosures at the end of this report


OSK Research
THE EARLY 21ST CENTURY MILD MASS HOUSING BOOM

Early 1970s subtle baby boomers and the early 21st century mild mass housing boom. The property
market came out from the 1997/98 Asian financial crisis just in time for the next mass housing boom in
1999/2000, when the 1970s subtle baby boomers reached their prime age for new household formation. It was
not an easy ride, however. Barely two years into the upcycle, the mass housing market was hit by the
contagion effects from the US dotcom bubble burst, the 9/11 terrorist attacks in the US, the Afghanistan and
Iraq wars, and the SARS outbreak. Although these events did not drive all potential buyers away, they spooked
a lot of people and many deferred their purchase of homes as a result. However, after years of waiting, they
grew impatient. Sometime in 2003, with a little help from a slew of incentives from the Government and a cut in
interest rate, these potential buyers returned with a vengeance. When most of the potential buyers who
delayed their purchase of houses during those last two uncertain years returned in 2003 and 2004, they did so
at a time when other 1970s subtle baby boomers, who by then had reached their prime years for new
household formation, were also looking to buy a home. Therefore, what we saw was four years (2001-2004) of
potentially high demand for mass housing compressed into two short years in 2003 and 2004, causing sales of
newly launched affordable houses to surge to unprecedented levels since the Asian Financial Crisis.

Figure 2.3: Launches and take-ups of new residential schemes in Malaysia


Units
55% 100,000

50% 90,000

80,000
45%
70,000
40%
60,000
35%
50,000
30%
40,000
25%
30,000
20%
20,000

15% 10,000

10% -
2003 2004 2005 2006 2007 2008 2009

Units Sold (RHS) New Units Launched (RHS) Malaysia Take-up Rate (LHS)

Notes: In the years of 2003 and 2004, >23-26% of the transactions in the overall residential sub-segment in Malaysia
were represented by the take-ups in newly launched units which were unusually high vis-à-vis the subsequent years.
The high volume of launches in 2003/04 represents the mass housings boom and the steep contraction in subsequent
years signifies the bust of the mass housing boom as the market becomes increasingly dominated by niche-lower-
density-high-end residential developments.

Source: NAPIC

The downfall. The boom in 2003 and 2004 must have convinced many emboldened developers to leverage
up, aggressively buy large tracts of land and embark on aggressive launches of mass housing projects.
Unfortunately, the mass housing boom inevitably peaked in the same year in 2004. Although there was still
new household formation, its momentum began to decelerate rapidly post-2004. Therefore, when demand
momentum failed to keep up with the rate of new and planned supply entering into the market, the mass
housing market rapidly fell into a deep recession for 6 long years (see Figures 2.4 and 2.5), exacerbated
further when desperate developers began to undercut one another to liquidate their inventory. Some
developers with very weak balance sheets failed and their projects were abandoned. It was also during this
time that some prudent and financially sound developers began to move in to grab market share, which
partially explains why SP Setia’s Setia Alam, even though launched at the peak, is still doing very well today as
buyers flock to ‘trustworthy’ developers.

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Figure 2.4: Real average affordable housing price index in Figure 2.5: Real average affordable housing price index in
Subang Jaya, Selangor Taman Mayang, PJ, Selangor

Price Index, Base Year = 1996 Price Index, Base Year = 2000
1.05 1.05

1.00
1.00
0.95 9-year Mean = 0.96
0.95
0.90

0.85 13-Year Mean = 0.85


0.90

0.80
0.85
0.75

0.70 0.80
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009
Real Housing Price Index In SS 12, 14, 18 (Single Storey Terrace) Real Housing Price Index In Taman Mayang (Double Storey Terrace)

Source : NAPIC, Bank Negara Malaysia, OSK Research Source : NAPIC, Bank Negara Malaysia, OSK Research

CHAPTER CONCLUSION

Mass housing the next big thing. The mass housing market has been in the doldrums for 6 long years. Its
momentous peak in 2004, preceded by a short but impressive upcycle, almost instantly came close to wiping
out the ‘unprepared’ mass housing developers when the momentum in new household formation began to slow
dramatically. When these developers failed, the larger and more financially sound developers began to move in
to grab the former developers’ market share as buyers flocked to the more ‘trustworthy’ developers. In the
aftermath of the downfall, some of these distressed developers have been rigorously repairing their balance
sheets, streamlining their operations and doing what is necessary to return to their glory days. If they can do
that in time for the next major boom in mass affordable housing early next decade, these developers are likely
to be able to gain increasing visibility among the investment community in the coming years.

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CHAPTER 2: HIGH-END PROPERTIES ENTERING FINAL PHASE OF LONG WAVE
BOOM

The country’s current boom in the higher-end residential properties is probably in its longest ‘bull run’
ever, spanning almost two decades since the early 1990s. Despite the occasional setbacks since the
onset of the boom, Malaysia’s higher-end residential properties have always rebounded much stronger
than before. This, unfortunately, has also given rise to the illusion of the infallibility of properties. This
chapter argues for the fact that we are now entering into the final phase of this secular boom, which
will be characterised by a period of fast rising property prices in the mid-to-high end residential
segment, particularly landed ones, dizzying euphoria and the population’s exceptionally high
confidence in investing in these properties. It will begin roughly around year 2009/10 and peak in
2012/13. Following that, as detailed in the next chapter, the outlook gets a lot more uncertain and
worrisome.

INTRODUCTION: THE GREAT HIGH-END PROPERTY BOOM

A 20-year secular (long wave) boom. The prevailing property theme during the 1980s, particularly in the
second half, was mass housing. By the turn of the next decade, the market made a transition from one that
was dominated by affordable housing to higher-value residential properties, as the 1950s Baby Boomers
turned from forming new households to buying trade-up homes (see Figure 3.1). Another major transition
st
occurred in the early 21 century; although mid-to-high end properties were still the prime focus, the purpose
and means of acquiring them began to change dramatically in the 2000s as the 1950s Baby Boomers moved
from upgrading their properties to accumulating investment properties perceived as safe long-term
investments. Thus, the mid-to-high end property boom, which began in the early 1990s, came in two almost
successive waves, resulting in a boom that has survived almost two decades. As a result, despite the
occasional setbacks such as the 1997/98 Asian financial crisis, the Age of Turbulence in early 21st century as
well as the most recent global Great Recession, Malaysian higher-end residential properties have always
rebounded much stronger than before (see Figure 3.2).

Figure 3.1: Percentage share of number of properties transacted annually based on prices
100% Increasing number of
high-end properties
95% transacted since
1993/94. Accelerated
90% since 2003/04

85%
Fast increasing
80% number of mid-to-
high end properties
75% transacted since
1993/94. Accelerated
in the mid-1990s and
70% again since 2003/04

65%

60%
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009

Klang Valley: Mass Houses Klang Valley: Mid-to-high End Houses


Klang Valley: High End Houses
Source : NAPIC

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Figure 3.2: Real mid-to-high end residential property housing prices (using Taman Tun, KL, as
proxy) and real Average Residential Housing Price (‘ARPP’)

Notes: Areas in grey indicate periods of economic turbulence

Source : NAPIC, Bank Negara Malaysia

The final lap. The 20-year secular boom in mid-to-high end residential properties cannot go on indefinitely.
This is because if the 1950s Baby Boomers have been the main engine driving the current secular boom, then
their eventual absence, as they reach retirement, will spell an end to the boom if there is no credible demand
force to promptly fill the void. Emerging from the recession of 2009, the Malaysian higher-end residential
property segment is set to enter the final phase of this secular boom before it peaks in early next decade. The
rebound will be unlike any normal recovery we have seen since the 1997/98 Asian Financial Crisis. Instead, it
will likely be a period characterised by fast rising property prices in the mid-to-high end residential segment,
particularly landed ones, widespread euphoria and the population’s exceptionally high confidence in investing
in these properties. This unusual phenomenon during the final phase of the secular boom, we believe, will be a
prelude to its ultimate peak after running its course for some 20 years. As we speak, this trend may have just
begun to run its course, as indicated by the remarkable rebound in real average residential property price since
late 2009 (see Figure 3.2).

THE UP-GRADERS & THE COMING BOOM IN TRADE-UP HOMES

The property ‘up-graders’. Upon entering Life Stage 3 in our late 30s, many of us will be driven by the desire
to invest in high-return asset classes with great tolerance to risk given greater financial demands. In addition,
with sufficient wealth built up over the years, and confidence in our own income and career prospects, most of
us would also be looking to buy bigger houses in more prominent addresses to house our families. When the
baby boomers become ‘up-graders’, they become an important demand catalyst driving the mid-to-high end
property boom-bust cycles.

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Figure 3.3: Year-over-year percentage change in number of population entering into 40-44, the
typical age for Malaysian families to upgrade their properties to trade-up homes

Notes: Grey areas highlight periods and potential periods of booms in trade-up homes

Source: OSK Research, U.S. Census Bureau

Tracing their footsteps. Dato’ Alan Tong shocked the market in the early 1990s when he said that he would
be developing large tracts of rubber plantations in the northern fringe of Kuala Lumpur into a high-end affluent
residential address. That place would soon be known as Mont’ Kiara. There were critics who believed that the
neighbourhood at that time was too isolated and had little to no infrastructure. By the mid-1990s, however,
merely a few short years into its launch, the place gained considerable popularity as a desired neighbourhood
of the affluent. Mont’ Kiara was not an isolated story, however, for similar ‘shocking’ stories also sprang up
around the Klang Valley at almost the same time in the early 1990s. Sri Hartamas, Mont’ Kiara’s adjacent
neighbour, also took off together with the latter in the early 1990s and quickly became popular by the mid-
1990s. Bandar Utama consisted of nothing but palm oil estates with a sparse population until 1991 when See
Hoy Chan Holdings began to develop the township, and it quickly became popular by the mid-1990s. These
developers must have sensed a wind of change that was about to sweep across the entire nation. This change
was the major turning of the Demographic Wave as the 1950s Baby Boomers were gaining affluence and were
moving from buying affordable houses during the 1980s to buying trade-up homes in droves in the 1990s. That
was the story of how the first wave of the current 20-year secular boom in mid-to-high end residential
properties began.

A boom in trade-up homes from 2009/10 to 2012/13. Moving from forming new households in the early
2000s, the first batch of the 1970s subtle baby boomers is expected to begin to enter the age of buying trade-
up homes in more desirable addresses by 2009/10 (see Figure 3.3). This will thus spark a sudden increase in
demand for mid-to-high residential properties, mimicking the trend of the early 1990s. As we speak, this trend
may already have started unfolding since late 2009 as developers’ launches are increasingly focused on this
particular residential segment to meet the sudden onslaught of demand (see Figure 3.4). However, given the
difference in how the 1970s subtle baby boomers came into being compared to the 1950s Baby Boomers, this
will be a milder version of the up-grading activities that occurred during the early 1990s. The ‘mini’ boom will
peak by 2012/13 as the last batch of the 1970s subtle baby boomers is expected to enter their third life stage
by then.

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Figure 3.4: Comparison of the percentage representation by price range of houses launched from
1Q07-1Q10 in the Klang Valley
100%

90%

34% 36% 35%


80% 38% 40%
46% 47% 46% 48% 46%

70% 60% 59%


63%
67%
60%
11%
26% 19%
50% 32%
10% 24%
23% 22% 20%
40%
29%
36%
30% 19%
33%
30% 16% 29%
37% 26% 27%
18% 22%
20% 26%
34%

10% 22% 19%


16% 17% 5% 0%
10% 13% 10% 12% 10% 12%
6% 5% 7%
0% 2%
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

<RM200k RM200k-300k RM300k-400k >RM400k

Source: JLW

‘OLD MONEY’ & THE INCREASED VOLATILITY IN THE 2000s

The ‘old money’. The quip that ‘Asians love properties’ is particularly true for many Malaysians who entering
into Life Stage 4, typically from the age of late 40s/early 50s and onwards. This group would have built up a
substantial wealth portfolio and a reasonably comprehensive insurance coverage with little financial demands
from the family. Now at the eve of retirement (retirement age is 55 for the private sector and 58 for the public
sector), they are naturally quite risk averse, but at the same time not too conservative as to keep everything in
cash or low-risk products. Known as the ‘old money dilemma’, the biggest question facing this group is how to
preserve their wealth to finance their retirement for the years to come. Investment in the financial markets such
as the stock market is undesirable as it is usually associated with high volatility. This thus leaves the group with
two other investment options which are traditionally thought of as being capable of offering a certain degree of
defensiveness, i.e. to hold cash (or low-risk-low-return investments) and/or invest in real assets (e.g. real
estate). With cash not being a good hedge against inflation, the real estate option becomes more attractive.

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Figure 3.5: Year-over-year percentage change in number of population reaching ages 50-54, the
typical age for affluent Malaysians to invest aggressively in real estate

Source: OSK Research, U.S. Census Bureau

‘Old money’ and the rise of volatility. As baby boomers turn more risk averse, they will substantially reduce
their exposure to volatile asset classes and divert a significant portion of their wealth into savings and
traditionally perceived defensive asset classes such as real estate. To investigate the likely effect of this, when
the 1950s baby Boomers began to enter into their fourth life stage in early-mid-2000s (see Figure 3.5), retail
participation in the domestic stock market also fell in 2004/05 and has since continued to remain lacklustre (see
Figure 3.6), hinting at a close correlation. Even the robust stock market performance in 2006/07 failed to make
much of a difference. The declining money multiplier, M1/M2 ratio, may also indicate a similar relationship with
the 1950s Baby Boomers having turned more risk averse in their investments since 2003/04 (see Figure 3.7).
As a result, the banks today are sitting on very high levels of liquidity. Pressured to find ways to put their
excess reserves to work, especially during periods of economic boom, the banks have been progressively
loosening their credit expansion in recent years. The repercussion of this is profound because while we have a
group of 1950s Baby Boomers who are looking to accumulate traditionally perceived safe real assets, we also
have the banks which are lending generously to these baby boomers to fulfill the latter’s investment goals.
Therefore, paradoxically, instead of stability, the collusion between demography and the banks has generated
a period of increased volatility in the real estate market in recent years by nurturing a ‘culture’ of excessive
speculation in the sector.

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Figure 3.6: Breakdown of trading (by value) on Bursa Malaysia
100% 3% 1.6
7% 7% 6% 6% 6% 6% 5%
11% 10% 14% 8%
90% 1.4
80%
35% 40% 1.2
70% 36% 43% 45% 53%
51% 48% 45% 51% 54% 63%
42% 71% 66% 1.0
60% 77%

50% 0.8
40% 0.6
30% 59% 54%
54% 49% 50% 0.4
20% 42% 45% 44% 44% 43% 40% 43%
37%
29% 34% 0.2
10% 23%

0% 0.0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Retail (LHS) Institution (LHS) Others (LHS) Trading Value Index, Base Year = 1993 (RHS)
Source: Bursa Malaysia

Figure 3.7: The Money Multiplier M1/M2 Ratio

31.0%

29.0%

27.0%

25.0%

23.0%

21.0%

19.0%

17.0%
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1H2010
Money Multiplier, M1/M2 Ratio
Notes: M2 is seen as precautionary money (i.e. Fixed Deposits) and M1 the more liquid form (i.e. Current Accounts). When
the populations are risk lovers, M1/M2 will rise. Vice versa, when the populations turn more risk averse, they will divert a
significant amount of their excess capital to more defensive asset classes and the money multiplier ratio will fall.

Source: Bank Negara Malaysia, NAPIC

Follow the ‘old money’. As the first batch of the 1950s Baby Boomers reached their fourth life stage
sometime in 2003/04, this sparked the second (and final) wave of the 20-year secular boom in mid-to-high end
residential properties. Their fervor for real estate caused increased volatility across different residential asset
classes, although one at a time rather than broad-based, within a short time-span in the 2000s. For example,
their possible participation in the 2003/04 mass housing boom intensified the boom and contributed to its
severe collapse in 2005/06. Subsequently, they may have channeled their funds to drive the 2007/08 high-end
condos boom to astronomical levels before it collapsed under its own weight in 2009/10, although not entirely.
During the two bust periods, proactive 1950s Baby Boomers hedged their wealth in mid-to-high end landed
properties in well-established locations. Therefore, we learned that one of the main investment themes in the
2000s is to follow the ‘old money’, i.e. as the 1950s Baby Boomers continue to enter their fourth life stage in
droves, where would they be investing their money next? The rest of this chapter seeks to answer that
question.

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Figure 3.8: 1950s Baby Boomers proactively move their funds from one residential asset class to
another as they enter the life stage of real estate investments in the early 21st century

Source: OSK Research, Malaysian Property Market Reports

‘OLD MONEY’ FUELED THE 2003/04 MASS HOUSING BOOM

The 2003/04 mass housing boom. As stated in the previous chapter, the 2003/04 mass housing boom came
about as the 1970s subtle baby boomers bought houses to form their new households. As many of them
st
deferred their decision to purchase during the turbulent years at the turn of the 21 century, their sudden return
into the market all at about the same time in 2003/04 caused sales of newly launched affordable houses to rise
to levels never seen in any given year since the Asian Financial Crisis. This was inevitable because buying a
house for new household formation was viewed as a necessity and not many couples were willing to delay that
decision for too long. The 1970s subtle baby boomers’ rush for affordable houses in 2003/04 coincided with a
time when the first batch of the 1950s Baby Boomers began to divert their wealth from volatile asset classes to
defensive ones such as the real estate. As such, although not under the category of high-end property, we
nonetheless suspect that some of the 1950s Baby Boomers, at least to a certain extent, jumped on the
bandwagon and participated in the mass housing boom in 2003/04, contributing to the unprecedented surge in
sales of new affordable houses. Mass housing was one of the major residential asset classes that the 1950s
Baby Boomers may have invested in as they entered their fourth life stage.

‘OLD MONEY’ DROVE THE 2007/08 HIGH-END CONDOS BOOM 

The 2007/08 high-end condos boom. When the mass housing market collapsed in 2005/06, some 1950s
Baby Boomers sought shelter in high-rise condominiums as well as in mid-to-high end landed properties, the
two residential asset classes that had yet to experience a bubble since the Asian Financial Crisis. As a result,
activities in high-rise condos began to warm up, spurring more launches of high-end condos and forcing prices
to move up slowly in certain centralised locations, although prices in general were still relatively stable. Not
many realised the repercussion from this, however, for the 1950s Baby Boomers were still sitting on a lot of
cash and eager to invest again. Upon signs of a recovering economy by late 2006, this group quickly redirected
its wealth to more risky real estate asset classes and high-end condos were an obvious choice, thus sparking
the 2007/08 high-end condos boom. Launches of high-end condos intensified further during this period and
new record-high prices were frequently reported. At its zenith in late 2008, prices of new high-end condos in
Kuala Lumpur City Centre (KLCC) averaged >RM1,400psf and RM700-900psf in Mont’ Kiara. At the eve of the
boom back in year 2006, they merely averaged about RM700psf and RM400psf respectively.

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Figure 3.9: Klang Valley luxury condos (priced >RM400psf) supply cycle

Additional Supply Over '06 Total Supply The final but


fatal supply
80.0% Sudden huge supply
wave to hit
wave hit the market in
the market in
70.0% late 2008
late 2011

60.0%
50.0%
40.0% Mounting
upward supply
30.0% pressure again
in 2010
20.0%
10.0%
2007 2008 2009 2010 2011 2012

4-star Condos And Above


Source: JLW, OSK Research

A huge bubble. There was little doubt that the boom since early 2007 had been one big speculative bubble.
Based on the average price of RM1,400psf in KLCC for a 1,500 sq ft high-end condo, the investor would have
to demand >RM10,000/month for rental just to break even in terms of cash flow (based on an 80% margin of
financing at a fixed borrowing cost of 5.99% for a period of 30 years). To earn a decent 7.0% yield, the investor
would have to demand a monthly rental exceeding RM12,000. This sort of rate was definitely out of the reach
by most of the local population, hence the targeted market segment was likely to be wealthy expatriates or
those subsidised by their companies. Even so, not many of were prepared to pay for such rates. As a result,
vacancy rates of newly completed high-end condos today are as high as an estimated 80% in the KLCC.

The downfall and the partial implosion. Distress emerged in late 2008 when new supplies of high-end
condos began to inundate the market. Amid that, the onset of the global financial crisis in late 2008 shocked
the entire market, setting the stage for an inevitable implosion in late 2008 that lasted until sometime in 2009.
Initially, some speculators/investors who did not have strong holding power contributed significantly to the
downward pressure. Others, however, hung on to their properties, thus cushioning the effects of the downward
spiral on prices. Thus, for example, high-end condos in the KLCC area only fell to about RM900-1,000psf on
average and rebounded to about RM1,000-1,200psf in the rest of the year 2009, instead of correcting back to
the pre-boom levels. The reason the implosion did not reach full circle, we believe, was mainly due to the still
very favourable demographic landscape. This, in turn, contributed to the optimistic psychology and convinced
many to hold on to their investments. This was aided further by favourable financing costs:

 Favourable demographic landscape. During the ‘partial’ implosion of the high-end condo
market in 2009/10, the Demographic Wave had yet to reach its major turning point (refer back
to Figure 3.5) as many 1950s Baby Boomers were still entering their fourth life stage. This
implied that demand potential was still, in fact, growing very rapidly during the period, which
would support the high-end condos market once prices had fallen substantially enough and/or
their high risk premium during the period had been substantially met, which, in turn,
contributed to the

 Optimistic psychology. In other asset classes such as the stock market, investors who have
high leverage recognise that their wealth is declining more rapidly than stock prices and so
they sell off. Speculators in real estate, on the other hand, are different, at least initially. Their
borrowings are not day-to-day brokers’ loans but come from banks on extended terms. They
have real assets, not just paper claims. Most choose to wait for the recovery that they reckon
is just over the horizon. As most recent buyers have been the 1950s Baby Boomers who are
in their fourth life stage and given the fact that the demand market continued to grow rapidly,
they were inclined to hold on to them. In addition, the fact that many were also likely to be
affluent and had much less exposure to the stock market (as discussed earlier, which shielded
many from the stock market meltdown in late 2008) provided the necessary holding power for
many to do so; and

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Figure 3.10: Graphical explanation of the partial implosion in high-end condos in 2009/10

Source: OSK Research

 Favourable financing costs. Bank Negara Malaysia’s series of measures to substantially


lower interest rate, which were promptly followed by the commercial banks, boosted their
holding power further, which enabled them to cling on to these properties and weather the
storm. Since the onset of the global financial crisis in late 2008, banks’ average base lending
rates had been lowered by as much as about 121 bps to about 5.51%, before inching up
again since early year 2010 as signs of the recession in 2009 waned.

An imminent rebound. Demand for high-end condos was dry in early 2009 as many prospective buyers
anticipated a further collapse in prices and were therefore sitting on the sidelines. However, when certain
developers began to offer attractive discounts/rebates (which brought effective prices much closer to the pre-
boom levels) and innovative financing schemes (which would effectively transfer substantial amounts of risk
from the buyers to the developers in the early years), many flocked to buy those properties. This indicated that
there were still many eager buyers (and still growing rapidly as well, as indicated by our Demographic Wave
model) but would only buy if their demand for high risk premium had been sufficiently met. As the sustainability
of the economic recovery appears increasingly more convincing, the risk premium demanded by prospective
buyers will narrow significantly by late-2010, an indication that the Klang Valley high-end condos are likely to
rebound soon.

Sell into strength. An imminent rebound does not mean a long-term sustainable recovery. For starters, the
road to recovery will be a bumpy one as Klang Valley’s newly completed high-end condos continue to be
plagued by very high vacancy rates. Secondly, they will be hit by another major supply wave by late-2011, a
repercussion from the aggressive launches since year 2007. These factors alone, however, may not
necessarily cause many speculators/investors to fret, as the partial implosion in year 2009 has proven. They
are unmoved by the prospect of low, if not zero, cash flow from their investments as long as there are
prospects for further capital appreciation. What may more likely to cause them to panic is when it becomes
apparent that the buying momentum can no longer be sustained for the long term as this would imply limited
prospects for capital appreciation. If the favourable demographic landscape, a catalyst to support long-term
buying momentum, is removed from the equation in Figure 3.10, it is obvious that the pillars of the entire
bubble structure will weaken and a mere push will cause the structure to crumble. That is precisely what may
happen sometime in 2012/13 when the Demographic Wave is set for a major turning as the last batch of the
1950s Baby Boomers enters into their fourth life stage (refer back to Figure 3.5). The bubble cannot last
indefinitely and investors who are highly exposed to this segment should take note of the rebound and take
profit prior to the peak in 2012/13.

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‘OLD MONEY’ HEDGES IN HIGHER-END LANDED PROPERTIES IN UNCERTAIN TIMES

In landed properties they trust. When the 2003/04 mass housing boom peaked in late 2004 and collapsed in
years 2005/06, some proactive 1950s Baby Boomers hedged their wealth in mid-to-high end landed properties
located in well-established locations. When the 2007/08 high-end condos boom began to implode and coupled
with the looming recession in late 2008, funds again sought shelter in mid-to-high end landed properties. Such
hedging, paradoxically, caused prices of these properties to outperform most other residential asset classes
amid times of uncertainties while others faltered (see Figure 3.11). On the other hand, during the 2003/04 mass
housing boom and 2007/08 high-end condos boom, the same mid-to-high end landed properties slowed
significantly as more funds were channeled to speculate and fuel the two booms. The unusually high
confidence in mid-to-high end landed properties as ‘safe haven’ investments, boosted further by a decade of
unbroken track record, will have great ramification for some years ahead in the next upcycle as it is the only
remaining residential asset class that has yet to experience a bubble since the Asian Financial Crisis.

Figure 3.11: In early 21st century, higher-end landed homes (using Taman Tun in KL as a proxy)
outperformed the sector in times of adversity and vice versa

Source: OSK Research, NAPIC

THE COMING PHENOMENAL BOOM IN HIGHER-END LANDED PROPERTIES

The coming boom in trade-up homes. As discussed earlier in the chapter, the arrival of the 1970s subtle
baby boomers into the market to look for trade-up homes commencing 2009/10 will cause a stir in the sector
and fuel an increase in demand for mid-to-high residential properties, mimicking the trend which occurred
during the early 1990s. We may also likely see mushrooming greenfield projects to develop ‘the-next-iconic-
affluent-addresses’ to capture this fast-growing pool of property up-graders, similar to how Mont’ Kiara, Sri
Hartamas and Bandar Utama emerged unexpectedly in the early 1990s to become the highly-sought-after
addresses of the affluent.

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An ordinary boom turns extraordinary. The boom in trade-up homes in 2009/10 may soon attract a torrent of
capital from the 1950s Baby Boomers who are still thirsting for real estate investment opportunities. This may
create a positive feedback loop that will accelerate the flow of funds by the 1950s Baby Boomers into this
particular residential asset class and soon entice the 1970s subtle baby boomers to become real buyers-cum-
speculators and join the buying frenzy. As a result, in the later phase of the cycle, the supposed ordinary
upcycle may be amplified and morph into a phenomenal boom.

A momentous union. The phenomenal boom is created precisely because a group of baby boomers who are
aggressively buying up trade-up homes bumps into another group of affluent baby boomers who are on the
lookout for real estate investments – both with the inclination for higher-end properties. Such occurrences, or
more famously known as property ‘super cycles’, have occasionally surfaced in the past, such as in the early
1980s and early-mid-1990s (see Figure 3.12). Generally, the process giving rise to such ‘super cycles’ has
always been similar – it begins with a boom in real demand from a particular group of baby boomers in their
third life stage, which in turn entices the baby boomers in their fourth life stage to channel their wealth into that
particular residential asset class. Mortgage boom and widespread euphoria quickly develops as more buyers
jump into the bandwagon, thus fuelling the boom further.

Figure 3.12: Demographic indicator of real estate bubble formation in Malaysia

Notes: Employing the wave theory from physics, when the two demand waves converge, they can either superimpose or cancel
out each other. Thus, when the two waves superimpose on each other to create demand, this can create a phenomenal
property upcycle, as indicated by the areas in grey.

Source: OSK Research, U.S. Census Bureau

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A property ‘super cycle’ in the making. What makes a property ‘super cycle’ extraordinary is not only due to
its magnitude but also its duration and irregularity. Post-Asian Financial Crisis, it took 12 years for real average
residential property prices to surpass the previous peak in 1997 (see Figure 3.13). In the interceding years, not
a single boom came close to a fraction of the magnitude and duration of the early-mid-1990s property ‘super
cycle’. Similar observations are made in the high-end landed properties (see Figure 3.14), i.e. real prices had
been stagnant or occasionally rose marginally to give investors meager excess returns over general inflation.
By late 2009, the entire landscape began to change; not only did real prices begin to surpass the previous
historical peak in 1997 but the encouraging magnitude of the jump in real prices was nothing like what we have
seen since the Asian Financial Crisis. What remains to be tested is whether this momentum can at least be
sustained over a longer duration but clearly, this is a sign of an encouraging emerging new trend. If this was in
response to the coming phenomenal boom in higher-end landed properties as described above, then, without
doubt, we are likely to be in the early stages of another property ‘super cycle’ that will primarily be led by this
particular residential asset class.

Figure 3.13: Real Average Residential Property Price Index

Source: NAPIC, Bank Negara Malaysia, OSK Research

Figure 3.14: Real average mid-to-high end landed properties price index in Taman Tun (KL)

Source: NAPIC, Bank Negara Malaysia, OSK Research

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The 2012/13 peak and its repercussions. The last batch of the 1950s Baby Boomers will begin to enter their
fourth life stage by 2012/13, before eventually moving on to their retirement (refer back to Figure 3.5).
Coincidentally, the last batch of the 1970s subtle baby boomers are also due to enter their third life stage in
2012/13, marking the end of the boom in trade-up home which begins in 2009/10. Just as surely as the
2009/10 boom in trade-up homes will justify the coming property ‘super cycle’, its peak in 2012/13 will probably
imply that the euphoria and widespread speculation during the period will no longer have fundamental
substance. This ‘twin’ turning in the Demographic Wave may significantly weaken the pillars that support the
bubble structure, which may crumble at a gentle push.

CHAPTER CONCLUSION

The age of volatility. The residential real estate cycle since the early 2000s has been marked by frequent and
violent volatilities. The 1950s Baby Boomers have become more risk averse in their investments since
2003/04, as exhibited by lower participation in traditionally more volatile asset classes such as the stock
market. As they approach retirement, they would divert a significant portion of their wealth into savings and
traditionally perceived defensive asset classes such as real estate. As a result, the banks today are sitting on
very high levels of liquidity. Pressured to find ways to put their excess reserves to work, especially during
periods of economic boom, the banks have been progressively loosening their credit expansion in recent years.
The repercussion of this is profound because while we have a group of 1950s Baby Boomers who are looking
to accumulate traditionally perceived safe real assets, we also have the banks which are lending generously to
these baby boomers to fulfill the latter’s investment goals. Therefore, paradoxically, instead of stability, the
collusion between demography and the banks has generated a period of increased volatility in the real estate
market in recent years by nurturing a ‘culture’ of excessive speculation in the sector.

Follow the ‘old money’. Despite of the implosion in high-end condos and the recession of 2009, the system is
still flush with liquidity. This money, at the end of the day, still needs to find a home and can never find no
better sanctuary today than in mid-to-high end landed properties, the last remaining residential asset class that
has yet to experience a bubble since the Asian Financial Crisis. Coincidentally, because this will also be a
period when the 1970s subtle baby boomers are expected to aggressively upgrade their residences by
snapping up trade-up homes in more desirable locations, the coming boom in mid-to-high end landed
properties may turn out to be a phenomenal one. However, if these two groups of baby boomers are the
primary engine driving the upcycle, then their eventual absence by 2012/13 may bring an end to the boom if
there is no credible demand force to fill the void. This report has so far emphasised on the general investment
behaviour of the baby boomers, i.e. the people who drive the booms in real properties. Yet, at the heart of most
upcycles still lies the financial system, without which there would be no meaningful boom. We will discuss the
central role of banks in funding and fueling real estate booms in the following chapter.

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CHAPTER 3: SOWING THE SEEDS OF THE NEXT MANIA

I love real estate. It’s tangible, it’s solid, it’s beautiful. It’s artistic, from my
standpoint, and I just love real estate.
-Donald Trump-

The conclusion from our Demographic Wave analysis in the previous chapter is that as we emerge
from the recession of 2009, Malaysian higher-end residential properties will enter the final phase of the
20-year secular boom before it peaks sometime in 2012/13. The rebound is expected to be rather
phenomenal and will be characterised by fast rising property prices in the mid-to-high end residential
segment, particularly landed ones, widespread euphoria and the population’s exceptionally high
confidence in investing in such properties. By 2012/13 however, there is the real risk that the super
cycle may slump just as spectacularly. Using the Minsky Model as an illustration, this chapter explores
how this coming real estate mania will develop, the central role of the banking sector in funding and
fueling it, and the repercussions that will follow. The chapter also argues that what may unfold over the
next few years is far from being merely a theoretical possibility, especially given the recent
developments in the real sector.

INTRODUCTION: MANIAS & PANICS

The timeless Minsky Model. The late Hyman Minsky’s theories link financial market fragility in the normal life
cycle of an economy with speculative investment bubbles endogenous to financial markets. Minsky claimed
that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative
euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenue,
which in turn snowballs into a financial crisis. As a result of such speculative borrowing bubbles, lenders tighten
credit availability, even to companies that can afford loans. The topography to a mania that ends in a crisis
goes through the following five stages – displacement, monetary expansion, euphoria, profit taking and panic.
Displacement is an exogenous shock to the macro system that changes the outlook and increasing opportunity
for profit. The boom and optimism spreads to the banking system, which begins to lend aggressively. The
credit expansion is not just through the banking system but through financial innovation that encourages
leverage, increasing profits as well as risks. It is here that the financial system evolves significantly from
‘traditional/hedge financing’ (where a borrower is able to service the loan and pay off the principal over time) to
‘speculative financing’ (cash flow is able to service the loan but not the principal) before advancing further to
‘Ponzi financing’ (cash flow can never meet neither payment requirements). Monetary expansion leads to the
third stage of overtrading, when borrowers begin to speculate and euphoria begins. In the fourth stage, the
market begins to top and there is a period of ‘financial distress’. There is growing uneasiness that some
overtrading firms/individuals and financial institutions will fail, and when they do, everyone rushes for the exit.
In the final stage, there may be panic that feeds on itself.

Sowing the seeds of the mania. The onset of the recession of 2009 sent shockwaves to all market players
but thanks to our relatively healthier banking system as well as the households’ healthy balance sheets, it did
not send our economy and financial system into a tailspin. However, it did set off a chain of events that would
have great ramifications years later, a result of the confluence of reactions from different market players in their
attempts to counter the blow from the recession. These events and their consequences, at least at the surface,
appear to be a mania that is developing on its own. In reality, they are the necessary conditions that facilitate a
potential proliferation of a great real estate mania for the years to come, which is very likely to be already in its
early development stage.

A BREWING MANIA: CREATING THE NECESSARY CONDITIONS

Smart ‘old money’ on the move. During the implosion of high-end condos and the recession in 2009, some
1950s Baby Boomers sought shelter in mid-to-high end landed properties, which was the only residential asset
class that had yet to experience a bubble since the Asian Financial Crisis. However, this phenomenon was
generally limited to some savvy ‘old money’ hedging their wealth in completed properties in well-established
locations but not so much in new property launches. The others, however, remained on the sidelines hoping in
vain for home prices to fall. For the developers to entice the ‘old money’ to invest in their new property
launches again at a time when risk aversion was high would require a plan that was out-of-the-box.

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The advent of innovative financing schemes. The recession caught many developers off-guard as new
property sales fell sharply, hindering their efforts to launch new projects as well as leaving certain developers
saddled with inventory. Faced with rapidly exhausting unbilled sales, rising competition and the management’s
good reputation to keep, certain developers became creative and offered innovative home financing packages
to attract prospective home buyers. The pioneer of such schemes was developer SP Setia, which in January
2009 came up with the ‘5/95 Home Loan Package’ which required a buyer to place a mere 5% downpayment
of the value of the property and be entitled to obtain a margin of financing of up to 95%. He/she would not be
required to pay anything else, including the loan principal and financing cost, until vacant possession. This
proved to be extremely popular as such a scheme would allow investors to transfer a substantial amount of risk
to the developers in the early years. As a result, new property sales during this period were even more
remarkable compared to during any other booms in the past 10 years (see Figure 4.1). The overall effect was
very clear – the biggest beneficiaries of such schemes were the mid-to-high end residential properties. Soon,
other developers jumped on the bandwagon and within weeks, innovative schemes that involved deferring
payment by another 1 or 2 years after vacant possession hit the market.

Figure 4.1: Approved home mortgages spiked up sharply since early 2009, reflecting the sudden
increase in buying of mid-to-high end residential properties

Approved Housing No. of units transactions


Mortgage Loan Index, Base = 4Q99
4.2
Index, Base = 4Q99 3.9
3.7
3.7 3.5
3.3

3.2 3.1
2.9
2.7
2.7
2.5
2.3
2.2 2.1
1.9
1.7
1.7
1.5
1.3
1.2
1.1
0.9
0.7 0.7
4Q99
1Q00
2Q00
3Q00
4Q00
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
Approved Mortgage Home Loans Index (LHS)
Residential Units Transacted Index, <RM250,000/unit (RHS)
Residential Units Transacted Index, >RM250,000/unit (RHS)
Source: Bank Negara Malaysia, NAPIC, OSK Research

The banks’ fervor to lend. The banks’ fervor to lend to the residential real estate sector even during the global
recession (see Figure 4.1) was driven by a confluence of factors. For starters, domestic banks were still awash
with liquidity (see Figure 4.2). As the country’s financial system and household balance sheets were still
healthy, the high level of liquidity pressured the banks to put their excess reserves to work. By early- to mid-
2009, the banks not only found a way to lend aggressively again but at the same time able to minimise their
lending risk as well by teaming up with developers to offer innovative house financing schemes. These
schemes were a win-win for the banks and developers. On one hand, it would lower the banks’ lending risks, at
least in the initial years, as interest payments would be backed by the blue-chip developers. The banks were
also not too concerned whether property prices would fall in the near term because they were essentially
betting that prices would, at least, remain firm in the longer term. On the other hand, this enabled the
developers to liquidate their inventory and recommence the launch of development projects to replenish their
unbilled sales. As lending risks were significantly reduced, the banks’ pressure to put their money to work
drove down the system’s average lending rates to historical lows by mid- to late-2009. On the other side of the
coin, these schemes opened up a lucrative investment opportunity to speculators and avid real estate investors
as they are now able to transfer a substantial amount of their risk to the developers in the early years.

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Figure 4.2: Commercial banks’ loans-to-deposit ratio and average lending rate
102.0% 14.5%

13.5%
97.0%
12.5%

11.5%
92.0%
10.5%

87.0% 9.5%

8.5%
82.0%
7.5%

6.5%
77.0%
5.5%

72.0% 4.5%

4Q96
2Q97
4Q97
2Q98
4Q98
2Q99
4Q99
2Q00
4Q00
2Q01
4Q01
2Q02
4Q02
2Q03
4Q03
2Q04
4Q04
2Q05
4Q05
2Q06
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09
4Q09
2Q10
Loans-to-deposit ratio of Commercial Banks (LHS) Average Lending Rate (RHS)

Source: Bank Negara Malaysia

Excessive appetite for risk. Beneath the remarkable mortgage boom is the growing appetite for risk, both
from domestic households and financial institutions. We note that such schemes have significantly shifted most
of the homebuyers’ and banks’ short-to-medium term risks to the developers. Consequently, these schemes
may have potentially pushed the homebuyers’ and banks’ short-to-medium term risks to way below their
respective desirable risk levels. Amid the easing of the recession and in the wake of the next property upcycle,
these market participants, especially the ‘old money’, may then realise that they may have been overly
underweight on real estate and may therefore grow impatient in increasing their exposure in the sector.
However, in the course of doing so, the entire system is actually taking on more risks than it normally should,
such as the case since mid-2009 when both the domestic households’ (see Figure 4.3) and banks’ (see Figure
4.4) exposure to mortgage loans increased substantially all of a sudden.

Figure 4.3: Household debt-to-GDP ratio and household residential mortgage-to-GDP ratio
32.0% 77.0%
31.0% 75.0%
30.0%
73.0%
29.0%
28.0% 71.0%

27.0% 69.0%
26.0% 67.0%
25.0%
65.0%
24.0%
23.0% 63.0%

22.0% 61.0%
2002 2003 2004 2005 2006 2007 2008 2009

Household Residential Mortgage-to-GDP Ratio (LHS)


Household Borrowings-to-GDP Ratio (RHS)
Source: Bank Negara Malaysia

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Figure 4.4: Commercial banks’ mortgage-to-total deposits ratio and mortgage-to-total loans ratio
39.0% 30.0%

37.0% 29.0%

35.0% 28.0%

33.0% 27.0%

31.0% 26.0%

29.0% 25.0%

27.0% 24.0%

25.0% 23.0%
1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10
Residential Mortgage-to-Total Deposits Ratio (RHS) Residential Mortgage-to-Total Loans Ratio (LHS)

Source: Bank Negara Malaysia

Developers’ incentives to extend the lifespan of innovative financing schemes. Thanks to the innovative
financing schemes, as discussed earlier, new property sales achieved by the developers, even during the
recession of 2009, have been stunning. Therefore, in addition to the unprecedented success, the developers
has all the incentives to continue to extend those innovative financing schemes, in the present form or another,
beyond their required lifespan, even during a period of economic boom if necessary, to at least match the
remarkable sales performance in the yesteryear and appease their shareholders’ expectations. A classic
example would be that the case of SP Setia, which introduced the ‘5/95 Home Loan Package’ in January 2009.
When the scheme expired in July 2009, it introduced the ‘Best For The Best’ home loan scheme in October
2009, which was similar to its predecessor, except that it extended the deferred payment scheme by another
year after vacant possession. Finally, when that scheme also expired in April 2010, the developer introduced its
third innovative financing scheme ‘Invest Setia Homes Scheme’, which was essentially similar to the ‘5/95
Home Loan Package’ in many aspects.

The illusion of infallibility of real estate. Even if an investor had bought a mid-to-high end landed property in
Kuala Lumpur at the eve of the 1997/98 Asian financial crisis, using houses in Taman Tun Dr. Ismail as proxy,
he/she could still boast a 12-year CAGR of 4.5% in capital appreciation today – a very lucrative investment, at
least if measured in nominal prices. However, in real terms, it took about 8 years for prices to recover back to
his last purchase price and 4 more years for prices to surpass that. Had someone invested in a house there at
the peak in 1997, it would have been either a disaster or a ‘boring’ investment (assuming no rental income), if
measured in real terms (see Figure 4.5). Similar observations can also be made for average residential
property prices in Malaysia. Therefore, if performance is measured nominal terms, there is an illusion that
prices of real estate have held up well very well. Another primary contributor to this sort of illusion, particularly
in recent years, is the resilience of mid-to-high end landed properties during economic turbulences and/or when
other real estate asset classes falter for the reasons discussed in the previous chapter (see Figure 4.6). The
illusion that real estate is fail-safe, particularly the mid-to-high end landed properties, breeds complacency and
entices market players to take on more risk than they normally would in this particular asset class.

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Figure 4.5: Price Index (Base Year = 1992) for real and nominal price of Malaysia Average
Residential Property Price and mid-to-high end landed property prices in Taman Tun (KL)

Notes: Areas in grey indicate periods of economic turbulence

Source: NAPIC, Bank Negara Malaysia

Figure 4.6: Y-o-y change in real Average Residential Property Price, real GDP and real Kuala
Lumpur higher-end landed homes (using Taman Tun as proxy), adjusted for GDP deflator
20.0% 60.0%
55.0%
50.0%
15.0% 45.0%
40.0%
35.0%
10.0% 30.0%
25.0%
20.0%
5.0% 15.0%
10.0%
5.0%
0.0% 0.0%
-5.0%
1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

-10.0%
-5.0% -15.0%
-20.0%
-25.0%
-10.0% -30.0%
-35.0%
-40.0%
-15.0% -45.0%
Y-o-y Change In Real ARPP (LHS)
Y-o-y Change In Real GDP (LHS)
Y-o-y Change In Real Housing Price In Taman Tun (RHS)

Source: Bank Negara Malaysia, NAPIC, OSK Research

A DISPLACEMENT IN 2009/10

The arrival of the 1970s subtle baby boomers. As discussed, the arrival of the 1970s subtle baby boomers
looking for trade-up homes in 2009/10 will certainly cause a stir in the market as they will fuel a sudden
increase in demand for mid-to-high residential properties. As their arrival will also be greeted by the 1950s
Baby Boomers who are entering into the market in droves looking for real estate investment opportunities, this
coming boom will unlikely to be an ordinary one, creating an extremely conducive environment for a property
‘super cycle’ to occur, especially in the mid-to-high end segment of the residential asset class. However, at the
heart of the boom still lies the financial system, without which the boom cannot possibly take off meaningfully.

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THE RISE OF UNFETTERED FINANCE & EUPHORIA FROM 2009/10

The heart of the real estate boom and mania. At the centre of most booms and mania is the role that the
financial institutions play in funding and fueling them. For example, the recent innovative financing schemes for
housing loans would not have been possible had the banks not collaborated with the developers to offer them
to prospective homebuyers. Similarly, the coming property ‘super cycle’ commencing 2009/10 would not have
been that phenomenal if the banks were prudent in their lending activities. However, as we have demonstrated
earlier, banks can be exceptionally loose in their credit expansion, especially when they realise that the
domestic households’ balance sheets are still healthy and are therefore still capable of taking on more risk.

A departure from traditional financing. The advent of innovative financing schemes and its subsequent
success has also demonstrated the society’s and financial institution’s shifting attitude towards debt.
Complacency has certainly played a major role in lubricating that transition. Borrowing the ideas from the
Minsky Model, these innovative financing schemes can also be uniquely called quasi speculative-Ponzi
financing because they depart from the traditional mortgage financing and follow a progression from being both
a deferred payment (for the homebuyers) and interest-only (for the developers) financing during the
construction period (in some cases, up to an additional of 2 years after vacant possession) before reverting
back to being a traditional financing. The fact that these schemes have been so successful and given the
series of prolonging their lifespan indicate that both the homebuyers and the banks today are more open and
receptive to the idea of speculative financing, at least while complacency and optimism continues to reign.
Therefore, it does not matter whether these schemes will lapse anytime soon because it is very likely that their
lifespan will be extended further, or some form of other schemes will eventually emerge to supplement or
replace them (e.g. see Figure 4.7).

Figure 4.7: A likely example of speculative financing schemes offered by the banks today

Notes: This scheme gives homebuyers the option to: (i) pay up to 50% of the original loan amount over time with the
remainder of the loan deferred until the end of the loan tenure; (ii) opt for interest-only repayment up to the first 5 years
of the loan tenure; and/or (iii) extend the loan tenure up to 40 years (from the conventional 30 years).

Source: Maybank

How innovative finances drive credit expansion and fuel the next mania. When the financial system is
shifting from a traditional mortgage financing to speculative financing, hardly anyone questions the increasing
amount of risk the system is bearing for the evolution itself increases demand for the underlying properties and
drives up their prices. Being a quasi speculative-Ponzi financing, these schemes enable the homebuyers to
take on a larger mortgage vis-à-vis via a more traditional mortgage loan because the monthly payment has
been significantly reduced and, in many cases today, is literally nil in the initial years for a property under
construction. Thus, the borrowers under these innovative financing schemes can pay a much higher price for a
property compared to a traditional mortgage borrower. In essence, they are not too worried whether they will
actually have sufficient cash flow to make debt repayments to cover the interest and the loan principal until 2 to
5 years later. In addition, such innovative financing schemes can potentially push the homebuyers’ and banks’
short-to-medium terms risk to way below their respective desirable risk level, giving them the illusion of being
too overly underweight on the real estate sector especially amid a recovering economy and in the wake of a
coming property ‘super cycle’. Given their financial capacity to buy properties at higher prices and a larger
appetite for short-to-medium term risk, the homebuyers will be very keen to increase their exposure to the
sector and leverage further. Accordingly, as the marginal mortgage is taken up by these borrowers, it drives up
the value of properties further, truncating the risk that property prices will fall before the deferred payment
schemes expire.

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THE RISK OF PROFIT TAKING & SLUMP BY 2012/13

This time is no different. This sort of quasi speculative-Ponzi financing, or any other speculative financing
schemes that may supplement or replace it in the near future, makes sense only so long as there is an infinite
pool of such borrowers driving up the prices of properties, essentially providing the necessary self-reinforcing
justification for the speculative positions they have taken. However, the demand pool is indeed finite because it
is constrained by demography.

First balloon payment comes due in 2011/12. To recap, the current innovative financing schemes for home
loans essentially enable the homebuyers to defer the service of the mortgage loan until 2 to 3 years later,
depending on whether the subject property being financed is a landed or a high-rise. Other more bold
developers have even offered up to an additional 1 to 2 years of deferred payment after vacant possession of
the properties. Therefore, at the latest, the first batch of the deferred payment schemes is expected to begin to
expire commencing early 2011 and will accelerate further into 2012 onwards, making it a very critical period to
watch out (e.g. see Figure 4.8). However, this in itself will not necessarily trigger an implosion to the mania if
demography remains favourable because if prices would indeed remain firm, bankers would remain supportive
and therefore be more than happy to refinance these borrowers’ mortgage loan repayments if necessary.

Figure 4.8: Maturity schedule of the recent deferred payment & adjustable rate mortgage
schemes, using the ‘sector’s bell-weather developer’ such as SP Setia as a proxy

Source: SP Setia, OSK Research

The major turning point in Demographic Wave in 2012/13. The last batch of the 1950s Baby Boomers will
begin enter their fourth life stage by about 2012/13, before eventually retiring. As there will be no demand force
that is capable to fill the void, 2012/13 will mark the major peak in demand momentum for real estate
investment by the ‘old money’ (see Figure 4.9). Coincidentally, the last batch of the 1970s subtle baby boomers
are also due to enter their third life stage in 2012/13 (see Figure 4.9), marking the end of the boom in trade-up
home which began in 2009/10. Just as surely as the 2009/10 boom in trade-up homes will justify the coming
property ‘super cycle’, its peak in 2012/13 will imply that the euphoria and speculation during the period will no
longer have fundamental substance. This ‘twin’ turning in the Demographic Wave will significantly weaken the
demand momentum that is needed to at least support the upward trajectory in property prices.

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Figure 4.9: Year-over-year percentage change in number of population entering the age of 40-44
(prime age to buy trade-up homes) and 50-54 (prime age to aggressively accumulate real assets)

Source: OSK Research, U.S. Census Bureau

Risk of profit taking & slump by 2012/13. Distress may emerge in the market when the first balloon
mortgage payment commences circa 2011/12. Of course, those who subscribe to such schemes would not
mind servicing the mortgage and/or paying off the principal over time so long as their cash flow by then would
enable them to do so. However, as the mania progresses, there is a risk that the use of speculative financing
by then would have become so widespread, as many would be expected to leverage further during the mania
to profit from it, that the only way for the system to stay afloat is for the property prices to keep rising. However,
the constraint of demography will imply that the demand momentum during the mania can hardly be sustained
post year 2012/13, capping the further upward trajectory in property prices. From then on, the speculative
borrowers would become so disillusioned that they may attempt to liquidate their investments quickly before the
banks come knocking on their doors. Unfortunately, they will find it increasingly difficult to do so by 2012/13
because of the demographic constraint. In addition, if property prices stop to appreciate, the banks, even if they
want to help, will find it difficult to justify refinancing the mortgage loans of these borrowers. Therefore, these
dates strongly indicate year 2012, or 2013 at the latest, to be the most critical period that will mark the peak of
what will perhaps be the country’s biggest residential real estate boom since the Asian Financial Crisis.

TAKING AWAY THE PUNCHBOWL: HOW EFFETIVE CAN THE MEASURES BE?

The present scenario. More than a decade of stability since the Asian Financial Crisis, market players and the
policymakers are already exhibiting signs of complacency. For example, the Real Property Gain Tax, which
was supposed to curb excessive speculation in the property market, was exempted in 2007. It re-
implementation in 2010 also seemed half-hearted. The market players, too, have become complacent, as
exhibited by their receptiveness to what may very likely turn out to be speculative financing. If the market is at
risk of developing a mania, then the onus is on the policymakers to contain the situation before it gets out of
hand. However, the question is – do they have the will and effective means to do so?

A dicey situation. In addition to political pressure, deciding when to take away the punchbowl is not easy. If
the policymakers rein in too early on speculation, they would be blamed for the slowdown that may ensue.
Doing it very much later in the game runs the risks of pricking the bubble and then being blamed for the
implosion. The third alternative, which is more likely to be adopted, is to progressively tighten their grip on
speculation, all the while being mindful of not stirring a panic. This can be approached via, for example,:

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See important disclosures at the end of this report


OSK Research
 Moral suasion. An example of this was done in 2009 when Bank Negara ‘persuaded’ the
banks to narrow their discounts to their respective base lending rates offered on their
mortgage loans. It worked for a while but without strict enforcement, the heated competition
compelled the banks to again widen the discounts to the levels they were before;
 Interest rates hike. Alternatively, Bank Negara can go hiking interest rates but so long as
property prices are expected to continue to rise and there are indeed excess returns to be
made, speculators are unlikely to be perturbed. In addition, subscribers to the recent
innovative financing schemes are not worried about the short-to-mid term volatility in interest
rates at all because they are not required to service their mortgages until a few years later;
and/or
 Head-on approach. The final likely alternative is to go head-on. Perhaps, the more popular
approach today, as it is also adopted by Singapore of late, is to lower and cap the Loans-To-
Value ratio for mortgage loans offered for the purchase of residential properties. However, this
approach may not be as viable and effective for now. Firstly, the residential asset class,
particularly for landed properties, is still considered to be one of the safer asset classes for the
banks to loan to, as we discussed earlier. Secondly, we are still in the very early stage of a
residential real estate upcycle. For the central bank to tighten its grip on the sector too much
and too early, this may likely be counter-productive as it would encourage the banks to
redirect their excess reserves to higher-risk unsecured and credit card loans. Finally, so long
as there is strong demand for credit and high excess liquidity in the system, developers and
banks will likely continue to innovate to circumvent enforcement, if necessary. This can be
done via, for example, more rebates from the developers to the homebuyers, which, in reality,
would likely to have already been built into the selling prices.

Free-market forces may reign in the end. Investors must bear in mind that so long as there is strong demand
for credit and high excess liquidity in the system, the market players will continue to innovate to circumvent any
mild enforcement by the policymakers, if necessary, unless the latter rein in hard on speculation. The high
liquidity in the banking system is already a given fact. The strong demand for credit will continue to come from
the 1970s subtle baby boomers who are still entering into the market in droves to look for trade-up homes and
from the 1950s Baby Boomers who at the same time entering into the market to look for real estate investment
opportunities. If anything, we believe that the Demographic Wave is a force that must be reckoned with and
these free-market forces may very likely, in the end, water down some of the impact from any mild enforcement
of policies to curb speculation in the real estate market. If the present situation persists, then this definitely
represents a perfect opportunity for investors to reap enormous profit from the trend today.

CHAPTER CONCLUSION

A brewing real estate mania. The collective actions from various market players to contain the effects of the
recession of 2009 have provided the necessary conditions for a huge real estate mania for the coming years.
The mania will build up due to the coincident arrival of the 1970s subtle baby boomers into the market by
2009/10 in search for trade-up homes at a time when the 1950s Baby Boomers are still eagerly searching for
real estate investment opportunities. In addition, the banks, flushed with liquidity, will certainly be more than
eager to fund and fuel the boom, encouraging the society and the financial system to leverage further and shift
away from traditional financing to speculative financing. By 2012/13 however, when the Demographic Wave is
due for another major turn, there is a real risk that the super cycle may slump just as spectacularly. Therefore,
2012, or 2013 at the latest, will be the most critical period that will mark the peak of what will perhaps be the
country’s biggest residential real estate boom since the Asian Financial Crisis. Although the expected peak
may have dire consequences, the phenomenal boom that immediately precedes it gives investors an excellent
opportunity to profit from the trend for at least the next 12 months.

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See important disclosures at the end of this report


OSK Research
CHAPTER 4: HOW YOU SHOULD INVEST IN THE NEXT MANIA

A property ‘super cycle’ is usually associated with a real estate mania. Although it can be a highly
exciting period especially when one is reaping an enormous profit from it, a mania can also be
devastating once it peaks. Therefore, ‘timing’ is of the essence to avoid being on the wrong side of the
trade when the property cycle turns. If the real sector is expected to enter into a phenomenal upcycle,
the developers listed on the stock exchange should also naturally be expected to ride high on the
boom. We therefore list the property stock picks based on the themes we presented earlier.

The investment themes. The winners during this upcycle between 2009/10 and 2012/13 are clearly the mid-
to high-end developers, particularly those with prime focus in the developments of landed properties. However,
the current valuations of these developers do not appear to be reflecting this yet. The property investment
portfolio in the next 12 months should be heavily weighted in property developers with main exposure to the
developments of mid-to-high end landed properties such as SP Setia and Plenitude (see Figure 5.1). As we are
in the final phase of the boom in mid-to-high end residential properties, the buying list should also include those
developers with focus on developing niche mid-to-high end non-landed residential properties such as Sunrise
and YNH Property. Pure mass housing developers were once considered the darlings of the sector until the
segment’s implosion about 6 years ago, which nearly wiped out the developers such as Talam and MK Land.
Some of these developers have been rigorously repairing their balance sheets and doing what is necessary to
return to their once glory days. If they could indeed shape up in time for the upcoming major boom in mass
affordable housing in the next decade, these developers are likely to enjoy increasing visibility among the
investment community in the coming years.

Figure 5.1: Summary of OSK’s stock picks for the property sector

Source: OSK Research

OVERWEIGHT on mid-to-high end developers. We foresee a strong upward re-rating in the valuations of
these property stocks over the next few months. During the last property upcycle in 2007, the P/NTAs of most
mid-to-high end residential property developers stood at as much as 3σ above their respective historical mean
(see Figure 5.2). That was the premium investors were willing to pay for developers which were expected to
benefit from the upcycle. As the next upcycle from 2009/10 to 2012/13 will be more phenomenal compared to
any we have seen since the Asian Financial Crisis, the valuations of these stocks should deserve to trade close
to, if not surpass, their respective year 2007 highs. Having said that, because the next upcycle will be led by
mid-to-high end landed properties, the upward re-rating of the developers with primary exposure to the
developments of such properties could be even more drastic vis-à-vis their high-end condo developer peers.

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See important disclosures at the end of this report


OSK Research

Figure 5.2: Price-to-net tangible asset multiple valuation matrix of selected property stocks based on how many
standard deviations above/below their respective historical mean
Current Peak
CY11 Valuation
P/NTA (x) +3.0σ +2.5σ +2.0σ +1.5σ +1.0σ +0.5σ Mean -0.5σ -1.0σ -1.5σ P/NTA In 2007
SP Setia 3.1 2.8 2.5 2.2 2.0 1.7 1.4 1.1 0.9 0.6 2.0 2.9
IGB Corp. 1.5 1.4 1.3 1.2 1.1 1.0 0.8 0.7 0.6 0.5 0.9 1.5
Sunrise 2.5 2.3 2.0 1.8 1.5 1.3 1.0 0.8 0.6 0.3 0.8 2.6
YNH Prop. 2.0 1.8 1.7 1.5 1.3 1.2 1.0 0.8 0.7 0.5 0.8 1.6
Bandar Raya 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.6 1.1
Plenitude 0.8 0.8 0.7 0.7 0.6 0.5 0.5 0.4 0.4 0.3 0.6 0.6
Hunza Prop. 1.6 1.4 1.3 1.2 1.1 0.9 0.8 0.7 0.6 0.5 0.6 1.3
Glomac 1.4 1.2 1.1 1.0 0.9 0.8 0.6 0.5 0.4 0.3 0.7 0.7
E&O 1.8 1.6 1.4 1.2 1.1 0.9 0.7 0.5 0.3 0.1 0.8 1.9
IJM Land 2.4 2.2 1.9 1.6 1.4 1.1 0.9 0.6 0.3 0.1 1.3 2.5
Mah Sing 2.6 2.4 2.2 2.0 1.7 1.5 1.3 1.1 0.9 0.7 1.3 2.4
Sunway City 1.7 1.5 1.4 1.2 1.1 0.9 0.8 0.6 0.5 0.3 0.8 1.8
= Current Valuation
= Peak Valuation In 2007
Notes: E&O, IJM Land, Mah Sing and Sunway City are not under our regular research coverage. These stocks are depicted here as
comparisons to the valuations of the stocks under our research coverage.

Source: OSK Research, Bloomberg

Valuation basis. Based on the hypothesis above, we are upgrading the 12-month target prices of all mid-to-
high end residential property developers under our coverage (see Figure 5.3) based on higher P/NTA multiples
assumption while leaving our earnings forecasts unchanged for now. Prior to these upgrades, our target prices
were approximately based on the P/NTA of the stocks’ respective historical mean. Since the mid-to-high end
landed properties will likely to be the top performers of the sector between 2009/10 and 2012/13, we
conservatively value their potential P/NTA during this period to be close to the peak valuation achieved in year
2007 (i.e. P/NTA at +2.5σ instead of +3.0σ above their respective historical mean). Other developers with
general exposure to the development of mid-to-high end residential properties have their P/NTA conservatively
valued at about +1.5σ above their respective historical mean. As the P/NTA of most mid-to-high end residential
developers are currently still within the ± 0.5σ band (see Figure 5.2), this implies that the upside potential to
these stocks over the next few months can be enormous.

Figure 5.3: Valuation metrics, calls and target prices of Malaysian property stocks under OSK’s coverage
Previous Revised
Price 12-month Current
Current Target Price Upside CY11 Targeted
Price (RM) Target Potential P/NTA P/NTA
Stocks (RM) (RM) (%) Call (x) (x) Valuation Basis
SP Setia 4.40 3.59 6.31 43.5 Buy 2.0 2.8 2.8x P/NTA, or 2.5σ above its 11-
(SPSB MK) year historical mean
IGB Corp. 1.81 1.94 2.41 33.1 Buy 0.9 1.2 1.2x P/NTA, or 1.5σ above its 10-
(IGB MK) year historical mean
Sunrise 2.00 2.28 4.62 130.9 Buy 0.8 1.8 1.8x P/NTA, or 1.5σ above its 11-
(SUN MK) year historical mean
YNH Prop. 1.68 1.83 3.03 80.5 Buy 0.8 1.5 1.5x P/NTA, or 1.5σ above its 6-
(YNHB MK) year historical mean
Bandar Raya 2.24 1.87 3.06 36.8 Buy 0.6 0.8 0.8x P/NTA, or 1.5σ above its 9-
(BRD MK) year historical mean
Plenitude 3.61 4.00 4.84 34.0 Buy 0.6 0.8 0.8x P/NTA, or 2.5σ above its 7-
(PLEN MK) year historical mean
Hunza Prop. 1.39 1.54 2.88 107.3 Buy 0.6 1.2 1.2x P/NTA, or 1.5σ above its 7-
(HPB MK) year historical mean
Glomac 1.40 1.82 1.82 30.0 Buy 0.7 0.9 0.9x P/NTA, or 1.0σ above its 10-
(GLMC MK) year historical mean
Source: OSK Research, Bloomberg

OSK Research | See important disclosures at the end of this report 37

See important disclosures at the end of this report


OSK Research

Figure 5.4: Malaysian property stocks under OSK’s coverage


THE BIG CAPS
Stocks Key Highlights
SP Setia  The leader of this upcycle. One of Malaysia’s largest developers, SP Setia is currently thriving on the
brisk sales of its mid-to-high end landed properties throughout the nation given its huge exposure in
(BUY; TP developing such properties. Therefore, it is likely to be one of the leaders in terms of earnings growth
RM6.31) during this upcycle. The successful launch of the colossal RM6bn EcoCity, an integrated mixed
development located next to the Mid Valley City, over the next 12 months will be an additional major
positive catalyst booster on the valuation and sentiment on the stock. SP Setia is our big cap sector top
pick.
 Valuation. At the peak of the year 2007 upcycle, SP Setia’s P/NTA was as high as 2.9x, or
approximately +2.5σ above its historical mean. Since the mid-to-high end landed properties will likely to
be the top performers of the sector between 2009/10 and 2012/13, we think SP Setia will potentially
trade close to, if not surpass, its peak valuation achieved in 2007. Therefore, we now value SP Setia at
2.8x CY11 P/NTA, bringing our 12-month target price to RM6.31 (from RM3.59). We used to value SP
Setia based on about 1.7x CY10 P/NTA. We are therefore upgrading the stock to a BUY from Take
Profit.

IGB Corp.  An opportunity to warm up to the upcycle. After the long delays, primarily due to the uncertain years
of 2008/09, IGB may finally get a chance to launch its two long-awaited high-end condos projects in
(BUY; TP Jalan Stonor and on the last piece of land in the Mid Valley City by year 2011/12. Although the values
RM2.41) are uncertain at this point, the latter’s project could be worth some RM600m (based on the assumed
average selling price of RM800psf on 750k sq ft of net saleable area).
 Valuation. At the peak of the year 2007 upcycle, IGB’s P/NTA was trading as high as 1.5x, or
approximately +3.0σ above its historical mean. However, as we do not think that high-end condo
developers should deserve to trade at this sort of valuation in this next upcycle, we are conservatively re-
valuing the stock’s potential P/NTA upwards to 1.2x, or +1.5σ above its historical mean, from 1.0x.
Consequently, we now upgrade the stock’s target price to RM2.41 (from RM1.94) and we upgrade our
call on IGB to a BUY from neutral.

THE MID CAPS


Stocks Key Highlights
Sunrise  A slew of project launches in the pipeline. Sunrise will be launching its CAD400m (or ≈RM1.2bn)
Canadian build-then-sell project and the RM679m MK20 serviced apartments project by Sept/Oct ’10
(BUY; TP and 1QCY11 respectively. On top of these, Sunrise is also looking to launch its RM508m Solaris Tower
RM4.62) (now called Menara Solaris) office towers, located behind the Renaissance Hotel, by Sept/Oct ’10.
Further cementing its brightening prospects amid the improving real sector outlook, Sunrise has lined up
a RM3.4bn worth of development projects to be launched by FY12. These include the RM1.6bn Solaris 3
(an integrated commercial development similar to and near Solaris Dutamas), the RM483m Bukit
Jelutong integrated development (a 50:50 JV project with Sime Darby, with the GDV indicated here
being Sunrise’s share), the RM736m development of premium homes in Kajang (comprising villa
terraces, semi-Ds and detached homes) and the RM619m MK22 (serviced apartments in Mont’ Kiara).
For conservative reasons, these projects are not imputed into our earnings projection for now.
 Warming up to the upcycle. Armed with these projects in hand, Sunrise may ride high on the broad
sector recovery in the mid-to-high end residential segment. The development of mid-to-high end landed
properties soon via its 58-acre landbank in Kajang (Klang Valley) worth RM736m could be an added kick
for Sunrise in this upcycle.
 Valuation. The partial implosion in high-end condos has pushed its valuation to somewhat depressed
levels. At the peak of the year 2007 upcycle, Sunrise’s P/NTA was trading as high as 2.6x, or
approximately +3.0σ above its historical mean. However, as we do not think that high-end condo
developers should deserve to trade at this sort of valuation in this next upcycle, we are conservatively re-
valuing the stock’s potential P/NTA upwards to 2.0x, or +1.5σ above its historical mean, from 1.0x. With
its P/NTA now merely trading at about -0.5σ to its 11-year historical mean, the potential upside to this
stock from the current level is enormous. We now upgrade the stock’s target price to RM4.62 (from
RM2.28). We maintain our BUY call on Sunrise.

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See important disclosures at the end of this report


OSK Research
Stocks Key Highlights
YNH  Strong earnings growth recovery in FY11. By very late 2010 or early 2011, YNH will be launching its
Property RM875m Kiara 163 (Mont’ Kiara) and RM533m Fraser Residence (behind the Renaissance Hotel)
serviced apartments. The successful launch of these projects will enable YNH to ride high on the broad
(BUY; TP sector recovery in the mid-to-high end residential segment, ensuring its strong earnings growth recovery
RM3.03) by FY11 and onwards. Note that we continue to discount any earnings contribution from Menara YNH
(although management says that it has sold off the project’s upcoming retail podium for RM300m) as we
are unsure when the construction activities of the tower will commence.
 Valuation. The partial implosion in high-end condos has pushed its valuation to somewhat depressed
levels. At the peak of the 2007 upcycle, YNH’s P/NTA was trading as high as 1.6x, or approximately
+2.0σ above its historical mean. However, as we do not think that high-end condo developers should
deserve to trade at this sort of valuation in this next upcycle, we are conservatively re-valuing the stock’s
potential P/NTA upwards to 1.5x, or +1.5σ above its historical mean, from 1.0x. With its P/NTA now
merely trading at about -0.5σ to its 6-year historical mean, the potential upside to this stock from the
current level is enormous. We now upgrade the stock’s target price to RM3.03 (from RM1.83).
Consequently, we upgrade YNH to a BUY from neutral.

Bandar  Replenishing unbilled sales. Although BRDB does hold a handful of prime upcoming projects, its
Raya hesitance to launch any of them between 2009 and mid-10 was mainly due to its pessimism on the
sector during the period. They viewed the timing of those launches in accordance to the property cycle
(BUY; TP as being more important to maximise shareholders’ value in the long run. The repercussion was,
RM3.06) therefore, increasingly exhausted unbilled sales and therefore the expected sharp 30% fall in FY10
earnings. To replenish is rapidly depleting unbilled sales, BRDB launched its RM80m Bandar Permas
Jaya (Johor) semi-Ds and RM270m CapSquare Condo 2 in July and August ’10 respectively. Both have
so far achieved a take-up rate of 60% and 20% respectively. BRDB is offering a 10/90 deferred payment
and interest absorption scheme during the construction period for the latter project.
 Preparing for the upcycle. Saving the best for last in order to ride high on the peak of the expected this
upcycle, BRDB is waiting to launch its low-rise condos in Taman Duta worth RM750m and the high-end
condos in Bukit Bandaraya worth RM750m in FY11. The successful launches of these properties amid
the anticipated vast improvement in the real sector outlook will ensure that BRDB’s strong earnings
growth will recommence in FY11 and onwards, after the blip in FY10.
 Valuation. The partial implosion in high-end condos pushed its valuation to somewhat depressed levels.
At the peak of the year 2007 upcycle, BRDB’s P/NTA was trading as high as 1.1x, or approximately
+3.0σ above its historical mean. However, as we do not think that high-end condo developers should
deserve to trade at this sort of valuation in this next upcycle, we are conservatively re-valuing the stock’s
potential P/NTA upwards to 0.8x, or +1.5σ above its historical mean, from 0.5x. With its P/NTA now
merely trading at the mean of its 9-year historical mean, the potential upside to this stock from the
current level is enormous. We now upgrade the stock’s target price to RM3.06 (from RM1.87).
Consequently, we upgrade BRDB to a BUY from neutral.

THE SMALL CAPS


Stocks Key Highlights
Plenitude  A small cap outperformer. Similar to its larger peer SP Setia, Plenitude has been thriving on brisk
sales of its mid-to-high end landed properties throughout the nation (in particular, on the Penang Island,
(BUY; TP Klang Valley, Johor and Kedah) given its huge exposure in developing such properties. Therefore,
RM4.84) Plenitude will also very likely to be one of the leaders in terms of earnings growth during this upcycle.
The successful launch of the residential developments on the 40.8 acres newly-acquired land in Batu
Ferringhi, Penang Island, could an additional catalyst booster. The development will comprise of high-
end condos as well as mid-to-high end landed properties. GDV for the project is not finalised at this
juncture but it could be >RM400m. Margin is expected to be high as the land was bought at a distressed
price from a receiver.
 Valuation. At the peak of the year 2007 upcycle, Plenitude’s P/NTA was trading as high as 0.6x only, or
approximately +1.5σ above its historical mean. Since the mid-to-high end landed properties will likely to
be the top performers of the sector between 2009/10 and 2012/13, we think Plenitude will potentially
trade close to, if not surpass, its peak valuation achieved in year 2007. In addition, given its improving
visibility among investors of late, we think Plenitude deserves to be valued at about 0.8x CY11 P/NTA,
bringing our 12-month target price to RM4.84 (from RM4.00). We used to value Plenitude based on
about 0.7x CY10 P/NTA. We maintain our BUY call on Plenitude.

OSK Research | See important disclosures at the end of this report 39

See important disclosures at the end of this report


OSK Research
Stocks Key Highlights
Hunza  Warming up to the next upcycle. After 4 quarters of sustainable and encouraging new property sales
Properties since mid-09 on the Penang Island, it appears that the island’s property market is on a much firmer
footing. In the most immediate future, Hunza could be looking to launch its RM300m Alila II
(BUY; TP condominiums in Penang sometime in FY11. Over to sometime in FY12, Hunza has already had its
RM2.88) RM300m Segambut condominiums lined up for launching. However, pending for further confirmation to
the details of the launching, the Segambut project is not imputed into our earnings forecasts for now. We
anticipate a further stronger earnings recovery and more buoyant sales of its projects in the next
upcycle.
 Valuation. With its P/NTA trading at <0.5x, or at -1.5σ to its 7-year historical mean, Hunza is perhaps
the most undervalued property stock under our coverage. At the peak of the 2007 upcycle, Hunza’s
P/NTA was as high as 1.3x, or approximately +2.0σ above its historical mean. However, as we do not
think that high-end condo developers deserve this sort of valuation in the next upcycle, we are
conservatively re-valuing the stock’s potential P/NTA upwards to 1.2x, or +1.5σ above its historical
mean, from 0.7x. We now upgrade the stock’s target price to RM2.88 (from RM1.54). Consequently, we
upgrade Hunza to a BUY from trading buy.

Glomac  Well-mixed between commercial and residential. The positive sentiment on the real sector would
soon spill over to smallish property stocks such as Glomac as well. Glomac’s fortunes going forward will
(BUY; TP be well-sustained by its integrated commercial and township development projects. These include Phase
RM1.82) 4 of Plaza Kelana Jaya (RM267m), Mutiara Damansara (RM235m) and the remaining components of
Glomac Damansara (RM596m). The developer continues to be primarily exposed to the development in
mass-to-mid housing townships as well as in integrated commercial properties.
 Valuation. Our valuation on Glomac is more conservative vis-à-vis other developers with primary focus
in the development of mid-to-high end residential properties. For starters, even at the peak of the
upcycle in year 2007, Glomac was merely trading at 0.7x of P/NTA, approximately the valuation the
stock is currently trading at. Having said that, the next phenomenal real estate upcycle may not only
provide a positive sentiment on the valuation of the stock but may also draw increasing institutional
investors’ participation, a catalyst which it lacked in recent years. In addition, the successful launches of
the above-mentioned development projects during this period could provide an additional booster to its
valuation. We therefore upgrade Glomac to a BUY (from trading buy) and continue to value Glomac at
0.9x P/NTA, with unchanged target price of RM1.82.

Source: OSK Research

CHAPTER CONCLUSION

Timing is crucial. An investor must be ready to adopt a somewhat shorter trading approach to benefit from
our anticipated property ‘super cycle’. Being able to time the swing in the real property cycle is paramount
during this period. As we believe that the valuations of Malaysian property stocks have yet to reflect the coming
upcycle, we think now is the best time for the equity investors to aggressively accumulate stocks of mid-to-high
end residential property developers, particularly those with prime focus in developing higher-end landed
properties. These stocks are the investors’ best bets over the next 12 months, after which they should adopt a
more cautious stance as we approach the expected peak in the real property cycle in year 2012.

OSK Research | See important disclosures at the end of this report 40

See important disclosures at the end of this report


OSK Research

OSK Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months
Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain
Neutral: Share price may fall within the range of +/- 10% over the next 12 months
Take Profit: Target price has been attained. Look to accumulate at lower levels
Sell: Share price may fall by more than 10% over the next 12 months
Not Rated: Stock is not within regular research coverage

All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed
will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or
financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment
decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest
and/or underwriting commitments in the securities mentioned.

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This research report produced by OSK Research Sdn Bhd is distributed in Singapore only to “Institutional Investors”, “Expert Investors” or
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or “Accredited Investor”, this research report is not intended for you and you should disregard this research report in its entirety. In respect of any
matters arising from, or in connection with, this research report, you are to contact our Singapore Office, DMG & Partners Pte Ltd (“DMG”).

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(A wholly-owned subsidiary of OSK Investment Bank Berhad)

Chris Eng

Kuala Lumpur Hong Kong Singapore Jakarta Shanghai

Malaysia Research Office Hong Kong Office Singapore Office Jakarta Office Shanghai Office
OSK Research Sdn. Bhd. OSK Securities DMG & Partners PT OSK Nusadana OSK (China) Investment
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Tel : +(60) 3 9207 7688 Central, Hong Kong Tel : +(65) 6438 8810 Indonesia China
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Fax : + (852) 2537 1332 Fax : + (6221) 520 4505 Fax : + (8621) 6288 9633

OSK Research | See important disclosures at the end of this report 41

See important disclosures at the end of this report