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 www.finance.yahoo.com, 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.
Any investment inquiries, contact author by email,
teguh.idx@gmail.com.
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