KUALA LUMPUR: CIMB Equities Research has downgraded the Malaysian property sector to Neutral from Overweight as its risk-reward ratio is now less attractive than earlier this year.

“We think the sector’s fundamental outlook for 2017 is similar to conditions in 2016 yet share prices of developers we cover have outperformed KLCI by 11% year-to-date,” it said on Thursday.

CIMB Research said developers that have lined up major launches of mass-market housing projects for next year offer the highest chance of exceeding 2016F sales in 2017.

The research house expects overall property sales to remain subdued next year compared to this year due to the unexciting macroeconomic outlook and sector fundamentals.

However, it thinks mass market residential projects could be one of the few exceptions, as there is still strong pent-up demand for this type of property; there was undersupply in the past few years.

“Among the developers that we cover, we believe Eco World (Add, TP: RM1.75) and LBS (Add, TP: RM2.15) have the highest chance of sustaining 2016 sales in 2017, as their launch line-ups consist of many mass-market housing projects, which we believe will still enjoy strong demand next year.

“We also like UOA Development (Add, TP: RM2.70) for its attractive potential dividend yield of 6% in 2017F,” it said.

It also said its rating for the property sector assumes that the economy will continue to grow at a decent rate (i.e. real GDP growth of around 4.2%) in 2017F. A sharp deterioration in economic conditions and rise in unemployment rate are the key downside risks to its call.

“Stronger-than-expected economic performance and potential relaxation measures by the government are the key upside risks,” it said.

To recap, it said property sales recovered in 3Q16 as six of the seven developers under its coverage registered 18% to 160% on-quarter sales growth.

However, property transaction activities lost momentum in early-4Q16 after a disappointing Budget 2017 was released for the sector and as many anticipated relaxation measures did not materialise. The volatile Ringgit movement against major currencies after the US election on Nov 8 compounded the property slowdown by dampening the sentiment of homebuyers.

“Our economist thinks that Malaysia’s GDP will still grow by 4.2% in 2017F, same as our projected growth rate for 2016F. However, we believe wage growth could be slower next year, due mainly to weaker business and consumer sentiment, which could cause employers to be more cautious in their capital and wage spending.

“We believe that the sector’s fundamentals neither improved nor deteriorated much in 2016. Property prices are still rising despite the oversupply of high-end properties and developers with mass-market products are still able to achieve their sales targets.

“However, we view issues such as low affordability, mismatch of supply and demand, high incoming supply of completed properties and rising competition from public housing projects, as continued risk factors for private developers’ sales,” it said.