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The Prospect of Property Stocks

The Jakarta Composite Index (JCI) rose 1.4% to 5,910 on its first trading day after the Ied holiday, thus it has risen 11.6% for year to date, or quite significant, and this is in line with our analysis at the beginning of the year (you can read again the article here). But as in previous years, there are always stocks in certain sectors that missed the train (read: also rising, but not as high as JCI), or even dropped.

And for this year, or at least until July, 3, the sector is property, real estate, and constructions, where the index of this sector (you can see it at, its symbol ^JKPROP) has dropped 4.0% since the beginning of the year, the lowest compared to other sector indices in the stock exchange. And if the time frame is extended to the last one year, then JCI has risen 16.6%, while the property & construction index dropped 9.0%, or in other words, the gap is getting wider. The question is, what happens? And whether this is an opportunity especially for property stocks, considering that today there are many of them whose market caps are already less than their book value, aka similar to the valuation of coal stocks just before they started to rise, a year and a half ago?

If we look at the financial statements of property companies in the first quarter of 2017, where their earnings are mostly dropped compared to the same period of 2016, then it is natural if most investor are lately less interested in the shares of Alam Sutera Realty (ASRI) et al, but the fact is that the property business itself has been sluggish for a long time. Yup, after it had its booming period in 2012 - 2013, entering 2014 the property industry began to slowing down, especially after Bank Indonesia (BI) as the central bank implemented some regulations such as raising the down payment ratio for the purchase of house (it’s called the rule of loan to value/LTV), which was aimed to avoid the bubble property like what happened in the United States a few years earlier (which led to the subprime mortgage crisis in 2008), but on the other hand it practically lowers the revenue of the developers. If you still remember, in 2012 or 2013, a person could buy a small shophouse in Pantai Indah Kapuk, North Jakarta, at a price of Rp2 billion (roughly US$ 170,000), then sell it at Rp6 billion, or making profit of 200%, less than a year later. As a result there were many people who buy property units not for residence but for sell it later at a higher price, in hopes of making a big profit in a short time, and usually they buy it using bank’s money aka debt (eg buy unfinished apartment units, where the price usually will jump up when the unit is ready, a few months later).

But when the banks enacted the LTV rules, these speculators soon lost their toys, and the developers could no longer playing with the prices of their property units to reap maximum profits as before. Actually, from the buyer’s point of view of the property itself, this was a good condition because they can buy the house at a reasonable price, but still, the condition caused the earnings of Bumi Serpong Damai (BSDE) dkk to go down. Another indication of the sluggish property industry is can also be seen from the stagnation of national cement consumption in recent years, that although infrastructure development in Indonesia is currently being accelerated, but the increase in cement demand from the construction sector remains unable to offset the decline in cement demand from the property sector (because 77% of the demand for cement comes from the housing sector, the rest comes from infrastructure).

However, if we look at the coal sector, which had been declined so much that there were many companies that stop its operations or even bankrupt in 2015 ago, but in the end the industry rise again, I believe that the property sector sooner or later will also rise. And although we do not know yet when it will happen, but if someone says that 2017 is the lowest point of the property industry, then maybe that's correct, given a few considerations:

Valuation of Property Stocks: It is quite low already

Firstly, as mentioned above, the stock valuations in the property sector are already low, at least if seen from PBV, where there are some property stocks whose PBVs are 0.7, 0.6 or even 0.5 times only. If compared to the valuation of the coal stocks at their lowest point in early 2016, which some coal stocks were only valued at PBV 0.2 times or even lower (yup, you read it right), the current valuations of property stocks may not seem low enough. In addition, in contrast to the beginning of 2016 where all the coal stocks were went down together, including the big caps (like Bukit Asam/PTBA, which had dropped below Rp5,000 per share), currently there are still some property stocks, for example Pakuwon Djati (PWON) or Summarecon Agung (SMRA), whose PBV is still relatively high (above two times or more).

But bear in mind that the current fundamental performance of property companies, although not as good as in three or four years ago, but not as bad as the fundamental of coal companies in 2015 – 2016. And unlike the coal companies that there were many of them which stopped their production or even went bankrupt when the benchmark coal price of Newcastle reaches its lowest point at US$ 52 per ton, currently the property developers can still build and sell the house, apartment etc as usual (although with smaller turnover and lower profit margins than before), and none of them fell bankrupt. In other words, if we expect to buy property stocks at the same low price as coal stocks in early 2016, then the property industry itself has to fall even further to the point where people become desperate. Yup, I still remember, exactly two years ago (July 2015, you can read the article here) the people are so desperate wit the low price of coal that they say that the coal industry is finished! That coal will be replaced by shale gas etc., which is more environmentally friendly bla bla bla. But in the case of property industru, until today, I have not heard anyone say that the property industry will be finished because it will be replaced by wooden house or something.

But it raises the question: Does that mean the property sector can still go down even further, since this sector has not yet reached its despair point? Because, if we see the example of coal, this sector only recovered after it passed its despair phase, isn’t it?

But I can answer, no. Normally the property sector will not become as bad as the coal industry two years ago, for at least two reasons. First, when the boom of coal peaked in 2011, there were many coal companies who took advantage of the momentum by doing the business expansion by using debt. Thus when coal prices start to fall and the company’s revenues decrease, their net income immediately dropped to negative/became losses due to high burden of debt interest, and some companies even went bankrupt for failing to pay the debt aka default. As the results, their stock prices slumped to the abyss.

But fortunately, currently there are only a few property developers whose debt is greater than its equity, thanks to Bank Indonesia which in 2013 issued a policy that prohibits property companies from taking out large amounts of debt, especially if the debt is denominated in US Dollars, considering that property companies earn 100% of their revenues in Rupiah (unlike coal companies whose their earnings are in US Dollars, as they export most of their mining products). Thus when the property industry began to slowing down since 2014, but only a few that suffer losses, and no one goes bankrupt (although for small-scale developers which their shares are not listed on the stock exchange, many of them were collapsed).

And secondly, since 2016, Bank Indonesia has loosened the LTV regulation, including lowering the BI Rate in order to stimulate the growth of banking credit including loans for mortgage. So although it will take time until the regulations eventually has a positive impact, but at least it will prevent the property industry to go down further. Thus, as the valuation of property stocks at this time is quite low already, then unless there is a certain force majeure or the JCI itself falls, then normally the stocks will not go down even more (except maybe some property stocks whose PBV are still high).

2018 – 2019: Property boom?

The first is related to the valuation of property stocks. Secondly, if we go back to 2012 – 2013, then try to remember: How could the price of a small shophouse skyrocketed to two or even three fold in less than a year?? There may be many answers to this question, but I will answer it from the standpoint of an investor: In 2011, Indonesia had its peak of economic growth, thanks to the commodity boom since nearly a decade earlier (the price of coal has started to rise since 2003), which led to the emerge of middle class society, ie the group of people who have more than enough money to meet their daily needs, even though their lifestyle has already luxurious (‘luxurious’ here is in a measure for a third world country), so they started to use their extra money for investment. And what investment instruments that are known to be easy, safest, and ‘its price can not go down’? That's right: Property! Whether it's land lots, houses, apartments, condotel, etc. Some people may also invest their money in gold or jewels, but the property is more preferable because it is ‘safer’, given the gold price was also fluctuating.

Therefore, the demand for property units increased, this time no longer for residency but for investment, and the demand continues to rise to the point where people were willing to buy property units at any price, because they already believed in the myth that 'house prices can not come down!' (and indeed this sacred sentence was repeatedly spoken by the marketing). This caused the prices to start rising further, and the increases went crazy when speculators, ie those who buy property not for investment let alone for residency, but for immediately sell it later at higher prices, also joined the game. Finally in mid 2013, some developers even dare enough to promise profit from ‘property investment up to hundreds of percent in a matter of months!

A big banner in Pluit, North Jakarta, in 2013. It says 'house in front of golf course and beach, prospect of profit 130% in 6 months'.

But as we know, the property sector has slowed down until the present day. So, back to the question above: How to make the property industry become ‘live’ again? First, the Indonesian economy in general must grow, people's purchasing power must be strengthened until emerge some people who have ‘excess money’, which they will spend it on property. And how to get the national economy to grow again? In that case we have to see once again, what is the backbone of the Indonesian economy, if it is not the commodities? Yup, so if we look at the cycle, first the price of coal, CPO, etc. rise, the economy grows, and eventually it’s time for property. In fact, the property industry reaches its peak in 2012 – 2013, or a year after the commodity boom peaked in 2011.

The good news, as we know, the price of commodities, or at least coal, began to recover since last year (although the price is not yet as high as in 2011), where if this trend continues, coupled with the continuous development of infrastructure, I’m optimistic that in 2018 – 2019, the positive impact of the above factors on the macro economy will be seen, and that's when property stocks will get their turn to 'get on stage' again.

Only if we return to the latest fundamental performance of the company, then the fact is until the first quarter of 2017, the majority of property developers still have not delivered satisfactory performance, and there are no certain fundamental factors that might make their performance become better in near future (in addition to the loosening of LTV regulations, more positive factors are still needed). But of course it won’t be hurt to put the property stocks into the watchlist, which we will buy the stock later when the timing is right, just like what we all did with coal sector, a year ago.

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