CLSA Alternative to play the interest rate sensitives with higher betas would be the property sector

Chris Wood argues that borrowing cost is coming down and it good for local asset price reflation. Indeed, as inflation appears well contained at 7.3%(a disciplined monetary policy where money supply shrunk Vs the west where money supply is expanding in an unprecedented way) the SBI benchmark interest rate has already come down by more than 200bp YTD to 7.25%. Learning a very expensive lesson from loose monetary policies and high debt levels (asian crisis where the Rupiah devalued 80%), this time round, IDR has been one of the best performing Asian currency (strengthening around 6% YTD), we can expect further cuts in the benchmark rate.

This is why banks have done so well but with the major banks approaching 3x book value (see Nick piece today), hardly a bargain anymore. An alternative to play the interest rate sensitives with higher betas would be the property sector. Indonesian property has historically appreciated around the inflation rate and not gone through the boom period like in Singpapore, Hong Kong etc. As such physical property prices has remained resilient, not coming down in the latest economic weakness.

Mortgage rates come down from 15-16% p.a in Jan 09 to 12% and less (some banks such as Niaga (BNGA IJ) and Permata (BNLI IJ) offering around 6% for the first year). Ciputra Development (CTRA IJ) probably the proxy for the sector already has a strong position in the middle-low landed housing segment, but smart property developers such as Summarecon Agung (SMRA IJ) and Bumi Serpong Damai (BSDE IJ) are also trying to capture the falling mortgage rate theme by offering more affordable products. Both these companies showed good marketing sales in the 1Q09 despite tough macro conditions. Jababeka (KIJA IJ) is also interesting industrial estate play with its 130MW power plants (one turbine has been completed) which should provide the company with more than 50% recurrent income.

Property plays makes sense as most are still trading at steep discount to NAV (some on high single digit PE). Even with the current rally, most are still a long long way from peak valuations.

This is clear with the collpase of demand from the west, Asians economies would start to focus more on their own domestic asset market. In China, our CRR study among 80 developers found that 45% of builders on the coast expect a YoY increase in new starts in 2009. As for Indonesia, historical low mortagage rates and low debt levels should continue to underpin a strong property market