PETALING JAYA: Property stocks face pressure in the coming months with foreign shareholders expected to pare down their stakes on concerns over the weakening ringgit and less bullish housing sales next year due owing to an anticipated global economic slowdown.

RHB Research has downgraded the property sector to “underweight” from “neutral” for the fourth quarter on lack of short-term catalysts, and said it expected the sector to continue underperforming the broader market.

“Valuations of many property stocks have become cheaper, but we continue to see further downside for the sector due to the two reasons given.

“We are also advising investors to avoid high beta tactical property sector play, given that heightening market risk premium of the global economy slipping into a double-dip recession is rising,” it said.

In tandem with other falling Asian currencies, the sharp weakening of the ringgit by 8% in less than two months suggests there would be more foreign equity selling going forward.

“This is reinforced by the declining liquidity in the system that has just started to come off in recent months. We take particular caution on large-cap stocks such as UEM Land, SP Setia and Mah Sing Group,” the research house said.

It expects developers to set less aggressive sales targets for 2012 after enjoying a good run in the past two years.

“While the effect of our expected sector-wide slowdown in property sales by 5% to 10% (based on a protracted growth assumption) has yet to be seen in the physical property market, as it takes time to filter through, the situation may become worse than expected if the global economy slips into a double-dip recession,” it said.

Kenanga Research, in a recent note, had also downgraded the property sector to “underweight” from “neutral” as good news flow from the sector seemed to have no positive impact on share prices.

“Developers did some landbanking during this quarter, but no real share price avail. We highlighted in our last third-quarter sector report that news flow is unlikely to re-rate developers’ share prices convincingly, but rather lend support to current levels.

“We felt the sector had outlived its bull run as the Kuala Lumpur Property Index uptrends tended to last no longer than 1½ years. This time around, the bull run lasted for 1¾ years,” it said.

The research house noted that the Sime-E&O merger and acquisition play had not resulted in an overly exciting share price performance for either party.

Also, Bank Negara was contemplating changing the computation of property mortgages to net pay from gross pay, which could be a negative for the sector, it said.

“Loans approved for residentials have also eased slightly. Malaysian real estate investment trusts, like CapitaMalls Malaysia Trust which is attempting to acquire East Coast Mall (in Kuantan), saw some share price rally. It does indicate investors are moving toward lower beta or more risk-averse stock,” Kenanga said.

SOURCE: The Star