Real Estate Investment Trusts

Maintain neutral call: Malaysian government securities (MGS) yield spiked in November to above 4.45% following foreign fund outflows from emerging markets. Currently, MGS yield is hovering at 4.35%, above five years mean plus two standard deviations of 4.3%.

The spike in MGS yield is negative to real estate investment trusts (REITs) due to the narrowing spread between dividend yield of REITs and MGS yield which reduces the attractiveness of REITs. Note that spread between dividend yield of REITs and MGS yield declined sharply in November, making it the thinnest spread in the past five years.

We are revising our MGS yield assumption higher by 25 basis points to 4% from 3.75% in view of high likelihood of the Federal Reserve raising interest rate which would keep MGS yield volatile going forward. Our new MGS yield assumption of 4% is close to five years mean plus one standard deviation of 4.1%.

We adjust our target prices (TP) for REITs under our coverage following the revision of MGS yield which translates into higher discount rate in our dividend discount model valuation.

TP for Axis REIT has been revised downwards by 2.3% to RM1.68 (from RM1.72); CMMT TP revised downwards by 1.7% to RM1.69 (from RM1.72); IGB REIT TP revised downwards by 2.4% to RM1.63 (from RM1.67); KLCCP Stapled Group TP reduced by 1.9% to RM7.16 (from RM7.30); Pavilion REIT TP revised downwards by 2.3% to RM1.68 (from RM1.72); and Sunway REIT TP reduced by 1.6% to RM1.83 from RM1.86.

Overall, the decline in TPs has been minimal and our recommendations remain intact.

Outlook for retail sector in Malaysia is expected to show marginal improvement in 2017 as we see that consumer sentiment should have bottomed out in 2015. In this context, we expect slightly better outlook for retail sales in Malaysia which should underpin rental reversion for retail segment to remain in the positive territory.

Meanwhile, we opine that the office segment of the Malaysia property market will continue to be a tenants’ market due to the oversupply of office space which render limited upside to rental reversion. — MIDF Research, Dec 5

This article first appeared in The Edge Financial Daily, on Dec 6, 2016. Subscribe to The Edge Financial Daily here.

SHARE
RELATED POSTS
  1. Axis REIT to acquire Klang industrial complex from Amsteel Mills for RM49m
  2. IGB REIT, IGB Commercial REIT net property income up in 4Q on higher rental income, increased occupancy
  3. Pavilion REIT’s 4Q net property income up 39%, pays 4.6 sen DPU