PROPERTY STOCKS -- OVERWEIGHT

FROM ECM LIBRA
A perfect Christmas gift
· Property tax only for sale within 5 years of acquisition
Prime Minister Datuk Seri Najib Tun Razak presented the perfect Christmas gift to the Malaysian property market when he announced yesterday that the real property gain tax (RPGT) of 5% will only apply to property sold within 5 years of the date of purchase. Recall that the government has re-introduced the RPGT during the 2010 Budget which imposes a flat 5% tax on gains from sale of property regardless of the year of acquisition with effect from 1 January 2010.

· An affirmative signal of accommodative stance
While there is still a 5% RPGT for property sold within 5 years going forward, we believe the toning down by the government from its earlier proposal will provide a much needed relief to the property sector as it sends an affirmative signal that the government will adopt an accommodative stance to support growth in the property sector. Although the revised property tax regime will dampen speculative activities, we took comfort from the fact that the flat tax rate of 5% is minimal as compared to the reducing scale rate from 30% to 5% of the RPGT tax regime prior to its suspension on 1 April 2007 (refer to Figure 2 for comparison).

· Residential properties sales will be strong
Even with the RPGT, over the past few weeks, we have noticed very strong take-up rates for landed residential properties, especially super-link terrace houses, semi-detached houses and bungalows which cater to the upper-middle class. We attribute such strong buying interest on the low interest rate environment as well as improving sentiment on brighter economic outlook. With the relaxation of the RPGT regime, we believe buying interest to pick up pace especially among upgraders who need to sell their existing properties first.

· Maintain OVERWEIGHT
We have upgraded the property sector earlier this month from neutral to overweight due to the convergence of sustained property demand, despite the RPGT, and recent price correction affecting property stocks which led us to believe that the property sector will be an outperformer going into 2010. We believe developers with residential properties catering to middle to upper-middle class such as Sunway City and SP Setia to benefit from strong demand and hence, rate these two as our top picks for the sector. Among non-rated property stocks, we also like IJM Land and Mah Sing.