Tuesday, 23 April 2013

Malaysian REITs losing lustre

PETALING JAYA: Local real estate investment trusts' (REITs) allure for investors may be waning on a combination of factors, including lower returns due to REIT prices approaching target prices pegged by analysts.

Analysts said that while the industry's longer-term prospects remained positive, REITs were now downgraded to “neutral” as unit prices approached targets.

Maybank Investment Bank Bhd analyst Wong Wei Sum said the average gross yield for Malaysian REITs was a trough of 6.4% compared to 6.6% in January 2013 and 7.4% at January 2012.

She said in a report that investors might be adopting more aggressive strategies post-general election (GE) as some of them had used defensive strategies after close to two years.

“Investors may adopt a more aggressive approach for the property sector favouring the high-beta developers post-GE,” she added.

Other reasons for the change in weighting included competition from business trust and potential higher overnight policy rate (OPR) in the fourth quarter, which was expected to see a 25 basis-point hike in anticipation of a higher inflation rate, she said.

Meanwhile, two other analysts told StarBiz that OPR estimates by their respective research houses were maintained at healthy levels, which would not pressure the profitability of REITs.

Wong also said: “DiGi.Com Bhd, the third-largest telco in Malaysia, is mulling over setting up a business trust, we understand. If it were to materialise, DiGi's net dividend yield would be even more attractive than the current level of 5.3% (financial year 2014) and more competitive than large-cap Malaysian REITs' 4.4% (net yield).

She added that competition could also stem from asset-rich developers like WCT Bhd, Dijaya Corp Bhd and Malaysian Resources Corp Bhd to unlock their assets value through REITs.
A general view of Mid Valley City. Maybank Investment Bank has downgraded IGB REIT to ‘hold’ while it has a ‘buy’ call on CapitaMalls Malaysia Trust.

An Affin Investment Bank Bhd analyst said competition posed by business trust in the near term would be minimal as investors might need time to understand its structure.

An RHB Research analyst said REIT sponsors had to inject at least RM1bil worth of assets to the instruments to achieve decent viability and liquidity.

She said that judging from the current completed assets that some of the developers had, it might take them a few more years to grow the asset sizes before listing them as REITs.

Thus, she did not see stiff competition from the REIT universe in the near term while KLCC Stapled REIT, which was en route to be listed this year was already on investors' radar.

Nonetheless, she was also neutral on the sector.

“Having said that, we will not see a selldown and a steep decline in REIT prices as the sector remains a good dividend play backed by asset value. Besides that, interest rates in the region are considered low,” she said.

The Affin analyst said she maintained an “overweight” for the sector this quarter but might tweak her computation following the financial results REIT players would announce in the coming weeks.

She said yields from REITs had been compressed to historical low and might look to downgrade the sector.

Maybank Investment has, in the report, downgraded Pavilion REIT, KLCC Property Holdings Bhd, Sunway REIT and IGB REIT to “hold” while it had a “buy” call on CapitaMalls Malaysia Trust.

The analyst from RHB Research said the brokerage's top pick was Pavilion REIT due to its location, asset quality and long-term growth prospects.

“When the mass rapid transit is ready, the Golden Triangle (in Kuala Lumpur) will be more vibrant and its growth will be even more attractive,” she said.

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