Investment summary

Sector valuations are very attractive right now, with four of the five top developers we cover lagging the MSCI Indonesia’s total return of 15% in IDR terms since the start of the year. On average, the sector is trading at more than 1.5 standard deviations below its 5-year average price/book, and we think the opportunity to add exposure in the sector is imminent. The current conditions have not been this favorable since 3Q 2015. We expect a combination of easy monetary policy and a gradual improvement in buyer sentiment to support a moderate recovery in presales in 2H17 and 2018.

1H17 presales hurt by political and regulatory uncertainty

In 1Q17, buyers stayed on the sidelines while developers delayed new launches due to tighter liquidity as well as significant political and regulatory uncertainty stemming from the tax amnesty, Jakarta governor elections and proposed reforms to property taxes. Presales picked up in May as regulatory and political headwinds subsided after the conclusion of the Jakarta governor election, but slowed again in June due to Lebaran. Overall, aggregate 1H17 presales for the five developers we cover rose 20% YoY and reached 43% of their FY17E target.

Preliminary data show stronger presales momentum in 3Q17, supported by new product launches in August and September and higher take-up rates of over 70% on launch day. We see potential for a strong pickup in presales in 2H17 vs. 1H17, and further recovery next year, supported by a back-loaded product launch schedule this year and indications from some developers that buyer sentiment has improved.

Home prices continued to climb in 2Q17, led by Greater Jakarta

Average home prices across Indonesia rose +1.2% QoQ in 2Q17, led by homes in the Greater Jakarta and Banten area (+2.0% QoQ), according to Bank Indonesia’s latest survey of the primary residential property market. Sales volume also continued to grow, with nationwide volume rising +3.6% QoQ, moderating from 1Q17’s +4.2% QoQ increase. Home prices are expected to rise a further +1.2% QoQ in 3Q17, with annual price growth accelerating to +4.0% YoY in 3Q17 vs. +3.2% YoY in 2Q17 and +1.6% YoY in 1Q17. Overall underlying demand for residential property in Indonesia remains strong, with a housing shortfall of over 12 million homes, according to government estimates.

Policy easing and infrastructure development support growth outlook

In August, Bank Indonesia lowered interest rates by a further 25bps, reducing its benchmark rate to 4.5%. Mortgage rates have been trending lower following six rate cuts by the central bank last year, and we expect mortgage rates to decline further from current levels. Combined with a stable rupiah, this should provide continued support for a strong recovery in property presales in 2H17 and 2018. Longer term, we also expect the ongoing development of toll roads and other key infrastructure projects such as the Jakarta MRT and Jakarta-Bandung high-speed rail to spur more property launches and boost demand for property in locations that benefit from improved connectivity. An example is the 30 km Serpong-Balaraja toll road now under construction that is expected to benefit BSDE’s BSD City township in Serpong and surrounding areas when completed.

Preferred picks

Stock ratings and potential upside Our preferred picks in the sector are Bumi Serpong Damai (BSDE IJ) and Ciputra Development (CTRA IJ) due to their solid balance sheets, strong project pipeline and flexibility in adapting their product mix to changes in buyer demand. Both offer deep value, trading below their respective 5-year average discounts to RNAV.

BDSE IJ has an attractivee growth outlook given its solid balance sheet and large, low cost landbank centred on BSD City in the wealthy Greater Jakarta region. Our models have been showing at least 38% of upside in the stock.

CTRA IJ has a large footprint across Indonesia, flexible and asset-light growth strategy, and wide product range. Long term growth outlook remains well supported by a strong pipeline of projects spread across the country. The stock is currently undervalued by 32%.