Kenanga Investment Bank (Kenanga), in its recent Malaysia property sector update (July 1), highlighted cautious sentiments amidst market exuberance driven by data centre investments and Johor's economic developments.

Kenanga maintains an UNDERWEIGHT stance on the sector, citing the adequately priced-in short-term impacts of data centres and Johor's economic transformation. The sector faces challenges such as oversupply, high household debt, elevated interest rates, and weakened consumer sentiment, though affordable housing shows promise. Kenanga downgraded MAHSING to MARKET PERFORM, and SIMEPROP and UOADEV to UNDERPERFORM, adjusting their price targets after recent share price gains, while recommending MKH as its top pick.

Investors have flocked to property stocks on the back of data centre investments and Johor's economic prospects. Despite these attractions, Kenanga notes that the market has likely factored in the immediate gains. Recent land sales by ECOWLD and UEMS to data centre developers at premium prices did not significantly impact share prices, underscoring the sector's current valuation challenges.

Kenanga advises investors with short-term views on data centres and Johor's growth themes to consider profit-taking, anticipating potentially diminished returns ahead. While these themes hold long-term potential, Kenanga cautions that the sector remains underweight in their recommendation.

The property sector grapples with multiple headwinds, including stagnant loan approval rates amidst inflationary pressures and rising household debt. Kenanga observes a stabilising trend in mortgage applications buoyed by affordable housing initiatives, though cautioning against easing loan standards amidst inflation risks.

Concerns over property overhang persist, particularly in Kuala Lumpur, Johor, and Selangor, with affordability barriers evident despite government support. The sector's 2023 performance, boosted by post-pandemic demand, faces uncertainties beyond 2024, hinging on sustained economic growth and affordability improvements amid rising living costs.

Kenanga underscores the industrial property segment's potential, driven by e-commerce growth and FDI inflows, diversifying risks from residential markets. Developers are recalibrating strategies towards affordable housing and transit-oriented developments amidst evolving consumer demands and economic uncertainties.

The house anticipates continued emphasis on affordability in Malaysia's property sector, supported by urbanisation trends and transit-oriented developments. While regulatory challenges persist, the sector's adaptability to market shifts positions it for sustainable growth amidst changing economic dynamics.

Kenanga downgrades MAHSING to MARKET PERFORM, and adjusts price targets for SIMEPROP and UOADEV due to valuation concerns. MKH remains their preferred pick, focusing on affordable housing and transit-oriented developments amidst economic shifts in Malaysia and Indonesia.