Jun 19, 2010

Deutsche remains positive on property

On a property report published on June 16, Deutsche Bank remains positive on the sector as sales velocity remain good and the trend appears to be continuing into 2010, driven by a favourable credit market, a relatively low ownership rate of 50%, and a growing middle-income population.
"We believe banks’ willingness to lend will continue to drive the property market owing to the under-leveraged nature of consumers and the low home-ownership rate of c.50%. While we do not expect further rate cuts, a relaxed lending policy should boost pre-sales this year," said Deutsche Bank's analyst Fiky Silvia said on the report.
The deposit rate cap, too, should continue to revive the middle and upper-middle segments as cash buyers have more incentives to invest in properties. 
Year to date to March, mortgage loans grew by 5%; while growth is still slow, we expect a gradual pickup as banks continue to cut their mortgage rates. 
Latest developments have shown increased lending competition in mortgages, leading to falling rates. In June, BCA re-introduced its fix and cap product, offering a 9.75% fixed-rate for the first two years, with the next three years capped at 11.0%.
This is a 150 basis points decline compared to 6 months ago. Meanwhile, Mandiri has reduced its 1-year fixed rate to 8.8%, a 170 basis points cut.
"We expect consumer spending to remain robust. Indonesia has one of the largest young populations, with those aged 15-45 accounting for 77% of the population," the report said. 
Income levels are also rising; GDP per capita has doubled from US$1,188 in 2004 to US$2,237 in 2009, and it is expected to reach US$4,800 in the next five years. The population of middle-income earners (GDP> US$4,500) is also expected to double to Rp50 million, thus increasing the demand for housing.

Top picks for Deutsche Bank:

PT Summarecon Agung Tbk (SMRA)
The outlook of Summarecon benefits from the demand in the upper-mid and high-end segment, where it has the highest exposure, resulting in its record-high pre-sales sales figure of Rp1.2 trillion in 2009.
The potential for further recovery in the housing market should continue to drive its performance; attractive mortgage rates coupled with banks’ willingness to lend will boost demand in Serpong and Bekasi, which targets the middle-market. 
Summarecon's management seems to have been astute in reading the market and has managed to move the most housing stock
The downside risks include reversal in the economic recovery trends adversely affecting demand, which could affect the price increase and take-up rate of its upcoming residential launches and leasing demand for its commercial portfolio, especially its new extension of Mall Serpong, delay in construction of a fly-over across its Bekasi area; without it, access into its development will be congested, and a worsening credit market.

PT Ciputra Surya Tbk (CTRS)
Deutshe Bank has a Buy rating on CTRS following our positive call on the sector. "We believe the
property market will benefit from low interest rates as 70% of sales are funded by mortgage loans," the report said. 
Mortgage rates have declined to below 10% in June from the peak of 15-17% in 2H08-1Q09, and we expect other major banks to follow suit with more rate cuts in the coming months to spur growth. The housing demand in Indonesia is still healthy, as home ownership stood at only 50% and mortgages to GDP are only at 2.5%, the lowest in the ASEAN region. As such, developers with great exposure to middle-level residential, such as CTRS, should benefit from healthy long-term demand and lower rates.
The Risks to Deutsche Bank's investment calls are an unfavourable macroeconomic environment, particularly
in terms of the interest rate outlook, delays in project completion and delivery, lower than-expected marketing sales from its flagship residential Citraland Surabaya and 4) cost overruns on the Ciputra World project, which will likely impact margin performance.

PT Jababeka Tbk (KIJA)
Since inception of its first turbine in second half 2009, Bekasi Power has not managed to sign a long-term deal with PLN; negotiations are still ongoing. As a result, BP continues to run below capacity and has booked losses in the last two quarters as a result. 
The property business, however, has seen recovery, with pre-sales up +15% qoq (+41% yoy) in 1Q10. The recovery in the property segment isn't material enough to support KIJA's valuation, in our view. Until we see
more light shed on the power plant, we maintain our Hold rating.
Upside or downside risks are higher or lower power price from PLN, higher or lower interest rates, oneoff
land sales from Cilegon estate, and favourable investment laws.

Deutsche Bank reiterate our expectations that landed residential will continue to flourish on the back of favorable mortgage rates and a strong economic outlook, which bode well for Bogor Nirwana project. Sales of condos, too, have seen a gradual recovery in 1Q10, with pre-sales up by 45% qoq (+73% yoy) to Rp42bn (equivalent to 45% of pre-sales). 
"We believe it may be boosted by the excitement over a possible revision of foreign ownership law. In spite of our caution of what the revision entails, Bakrieland 's condo sales may benefit from the positive
sentiment," the report said. 
Meanwhile, its newly operating toll road (Kanci-Pejagan) missed the company's target by half on average daily traffic owing to the higher tariff (more than double the connecting toll road's tariff). 
"While the top-line is set to improve in 2011, we expect poor earning per share growth as interest and depreciation expense knock down earnings."
The downside risks include reversal in the economic recovery trends adversely affecting demand, which could affect the price increase and take-up rate of its upcoming residential launches and leasing demand for its commercial portfolio, especially its new extension of Mall Serpong, lower than expected traffic volume for its toll-road, and a worsening credit market.
Upside risks are stronger-than-expected property market recovery translating to higher-thanforecast prices and take-up for its condo projects in Epicentrum, a better risks appetite from the banking sector as half of Bogor Nirwana's sales are funded by mortgage loans, escalation of Bogor Outer Ring Road II, which could visibly improve access and address the traffic congestion, hence driving up the take-up rate, and an easier and faster land procurement process for its next two toll-road projects, the Ciawi-Sukabumi and Pejagan-
Pemalang sections.

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