Glory days for M-REITs may soon pass
Business & Markets 2013
Written by theedgemalaysia.com
Tuesday, 23 April 2013 10:11
M-REIT
Downgrade to neutral (from overweight): While remaining positive over the longer term prospects, we downgrade the Malaysian real estate investment trust (M-REIT) sector to “neutral” because:
(i) unit prices are approaching our targets;
(ii) investors may adopt more aggressive investment strategies post-election;
(iii) competition from the new yield instrument — business trust; and
(iv) likely interest rate hike in the fourth quarter of 2013 (4Q13).
We downgrade Pavilion REIT, KLCCP REIT, Sunway REIT and IGB REIT to “hold”.
Axis REIT and QUILL CAPITA TRUST [] (QCT) are under review.
Our “buy” pick is CapitaMalls Malaysia Trust (CMMT).
Unit prices of M-REITs under our coverage have risen by 2% to 22% (except QCT’s 3%) since we upgraded the sector to “overweight” in December 2012. They have also outperformed the FBM KLCI’s 1.5% rise thanks to the defensive strategy adopted ahead of the election. The average gross yield for M-REITs is 6.4% (2013) compared with 6.6% as at January 2013 and 7.4% as at January 2012.
Investors may adopt a more aggressive approach for the property sector favouring the high-beta developers post-election. This is after about two years of defensive strategies. Moreover, valuation gaps are less enticing at this stage, at only 300 basis points (bps) above 10-year Malaysian Government Securities’ 3.4%, against 313 bps in January 2013. The yield spread between M-REITs and Singapore REITS (S-REIT) has, however, expanded to 86 bps (up 49 bps since January 2013) due to stronger demand for S-REITs post the US Federal Reserve’s third round of quantitative easing and Japan’s stimulus package.
We expect more business trusts to be set up in the medium term given the attractive incentives. We understand DIGI.COM BHD [], the third largest telco operator in Malaysia, is mulling setting up a business trust. If it materialises, DiGi’s net dividend yield could be even more attractive than the current level of 5.3% (2014 financial year [FY14]) and more competitive than large-cap M-REITs’ 4.4% (net).
Our house expects a 25 bps hike in the overnight policy rate in 4Q13 in anticipation of a higher inflation rate due to the implementation of the minimum wage and the resumption of the subsidy rationalisation programme in the second half of 2013. A higher interest rate will not only reduce the attractiveness of M-REITs for yield-focused investors but also their profitability.
SunwayREIT will be most affected (37% fixed-rate loan only), while the impact will be muted on QCT, Pavilion REIT and IGB REIT.
We are downgrading Pavilion REIT, KLCCP, Sunway REIT and IGB REIT to “hold” after the run-up in unit/share prices while maintaining a “buy” on CMMT. M-REITs’ defensive return runs contrary in a “risk-on” environment that favours pro-cyclical asset classes such as developers, in our view. — Maybank IB Research, April 22
This article first appeared in The Edge Financial Daily, on April 23, 2013.