It was widely reported that the Prime Minister Datuk Seri Najib Tun Razak announced that the Real Property Gains Tax (RPGT) of 5% will only be applied to properties sold within five years of purchase i.e. property sold after 5 years from date of purchase will not incur the 5% RPGT. The news is no surprise as the market was speculating of a revising terms for the RPGT of 5% which was announced in the 2010 Budget of the country in October 2009.
It is definitely good news that non-speculators will not be penalized. It allows those holding properties for >5 years to sell their homes and recognized 100% of the capital gains to upgrade their homes. In turn, this spurs genuine property activities, which are supported by the country’s fundamentals, as oppose to speculative activities.
We are very comfortable with the 5% RPGT on homes held for <5 years as it curbs speculative activities; this is mainly seen in the KLCC vicinity, Mont Kiara/Hartamas and some areas of Penang Island. In the KLCC and Mont Kiara/Hartamas areas, we believe there is an oversupply of high-end high-rise residentials with limited rentability. The RPGT helps cool potential over-selling in these areas since 1) capital gains upward momentum will be slow 2) lack of tenants.
However, the news illustrates uncertainties in policy making, which may shake foreign investors’ confidence. We called the IRB and were informed that they were not informed of this new announcement. They also added that the 5% RPGT proposals has not been gazette yet. We asked if the 5% RPGT will apply if one would to sell a property on 1st Jan 2010 if the proposal has not been gazette yet. IRB said than the 5% RPGT will not be effective, until the proposal has been gazette. Given that we are approaching the last week of Dec 2009, it appears that the 5% RPGT may take effect at a later date. If so, it adds more elements in uncertainty in Malaysia’s policy making.
The RPGT is inevitable. We know that it is only a matter of time before full RPGT finance bill is back (0%-30%). Additionally, some argue that the 5% RPGT could be a prelude to the upcoming GST system. Delaying imposition of the RPGT could be very detrimental to sentiment as property investors require clarity in policies to better strategize their investment. We hope that the government will clarify and ink its stance quickly.
We are likely to upgrade the property sector to a Trading BUY (from NEUTRAL) in our upcoming 2010 Strategy. We continue to prefer diversified developers with strong bread & butter / recurring base income coming from investment properties/townships. We believe the relief of no RPGT for holding properties for >5 years will spur the genuine market implying townships and matured suburb developments.
We still reiterate our calls; Mah Sing Group – BUY – RM2.10, SP Setia - Trading BUY – TP: RM4.25, Hunza Properties – Trading Buy - TP: RM1.96 (rights issuance to kick-start its mall works), E&O – HOLD - TP: RM1.29 (ultimately price will hold above RM1.00 after 2 years of ICSLS 2009/19 issuance as E&O does not want to continuously pay 8% coupon interest p.a. for the ICSLS). Defensive property companies and REITs, like KLCC Property Holdings – HOLD - TP: RM3.44 and Axis REIT – BUY - TP: RM2.28 remains unaffected, unless there are plans for disposal.
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