Whatever the case, analysts say IGB is coming to the market as retail REITs are in vogue relative to other cash flow generating real estate classes like offices or even hotels. Incidentally, its closest peers — Pavilion REIT, Sunway REIT and CMMT — are also retail-centric and are the largest REITs in Malaysia.
CMMT’s implied value was RM3.07 billion on Aug 8, behind Sunway REIT’s RM3.99 billion and Pavilion REIT’s RM4.11 billion. IGB REIT, which will debut with a 3.4 billion unit base, will have a RM4.25 billion market capitalisation at its RM1.25 indicative price.
A potentially even bigger retail-centric REIT that could come to market is KLCC Property Holdings Bhd (KLCC Prop), whose over RM12 billion real estate portfolio includes the Suria KLCC mall, part of the iconic Petronas Twin Towers.
KLCC Prop had indicated its intention of a REIT, a move that Maybank Investment Research analyst Wong Wei Sum reckoned “would improve the breadth and depth of the sector” and make M-REITs more appealing to international investors.
In a July 12 note downgrading the sector to “neutral”, Wong said Malaysian retail REITs are already trading at 4.6% to 5% 2013 gross dividend yield, in contrast to their Singapore peers that fetch 5.7% to 6%. “The next re-rating catalyst [for the sector] could be the REIT-ing of KLCC Prop which may set a new benchmark in cap [capitalisation] rates,” Wong wrote.
CIMB Research analyst Foong Wai Mun remains bullish on the M-REIT sector although the larger-cap REITs are already fetching an average premium of 37% over their asset value.
“We believe this premium should be sustained as investors chase high-yielding and defensive stocks with quality earnings, such as the retail REITs, in uncertain market times,” Foong wrote in a July 20 note.
Among the larger REITs, the analyst said Pavilion and Sunway REITs have large percentages of tenancies expiring in 2013 — a situation that could be interpreted either way, given that rents could well be revised upward for spaces with strong demand. Tenancy renewals for CMMT and IGB REIT are relatively better spread out. For IGB REIT, some 35.5% of NLA representing 38.7% of gross rental income is up for renewal in 2013, its draft prospectus read.
Foong expects Pavilion REIT to see strong rental reversions when 67% of its NLA is up for renewal next year, as is the case for Sunway Pyramid mall in which 63% of NLA is due for renewal in September 2013. Supporting his forecast is the Malaysian Retail Association’s projection for retail sales to grow 6% year-on-year to RM88.2 billion in 2012.
Well-capitalised REITs are expected to continue being a defensive safe haven amid volatile market conditions and a low and stable interest rate environment,according to analysts.
CIMB Investment Bank Bhd is manager, joint managing underwriter, joint global coordinator and a bookrunner for IGB REIT. Maybank Investment Bank is one of four underwriters.