Property sales are expected to recover in the second half of 2016, driven by higher consumer confidence and improved economic outlook.

CIMB Research in a report said it is maintaining an “overweight” call on the local property sector, adding that the situation was “not as dire as initially thought.

Following a meeting with analysts and fund managers, the research house said that the property sector’s fundamentals are better than its initial perception.

“The majority of investors agreed with our view that the sector’s valuation is cheap and its fundamentals are not as dire as initially thought. However, many prefer to stay on the sidelines as there are no visible near-term catalysts for property sales.

“Also, some feared that the developers may cut their 2016 sales targets due to the weak sentiment in the first quarter of 2016 and difficulty for the buyers in getting bank financing.”

It said while the risk of developers cutting sales targets cannot be discounted, CIMB Research added that the impact on property stocks must not be overplayed.

“For one thing, the fact that there are concerns about developers cutting sales targets mean that at least part of the risk is already reflected in the current stock prices. For another, weak property sales in the first quarter of 2016 do not hinder a recovery in the second half of 2016.

“A turning point in property sales, in our view, would be a stronger driver of share prices than full-year sales performance.”

CIMB Research noted that some investors were also concerned about the high loan-to-deposit ratio (LDR) in the banking system, which they believed constrain the banking system’s liquidity and restrict the banks’ ability to approve mortgage loans.

“Although there is no quick fix for LDR, it is not the only measure of the banking system’s liquidity. The liquidity coverage ratio, one of the primary measures of liquidity in Basel 3, shows that the liquidity of the Malaysian banking system remains very healthy.”

The research house said Eco World Development Group Bhd remains its top sector pick as it is the sector’s bellwether.

“We also like UOA Development Bhd for its prospects of higher sales, LBS Bina Group Bhd for its attractive dividend yield and stronger earnings and Eastern & Oriental Bhd for the news about its STP2 project that could re-rate its share price.”