Mixed prospects for M-REIT stocks
Cheah Chor Sooi 
Interest rate direction is one of the main factors influencing the performance of M-REITs in 2018, says Ng


THE recently-launched REIT index ended the last trading day of 2017 at an all-time high of 1,057.35 – surging 6.88% or 68.05 points – in tandem with robust window dressing which saw the FBM KLCI peaking at the year-high of 1,796.81.

Although this was by far the highest close in terms of percentage among Bursa Malaysia’s 27 indices on Dec 29, it beckons the question of the sustainability of the Malaysian real estate investment trusts (M-REITs), moving forward.

The Malaysian REIT Managers Association (MRMA) sees the interest rate direction as one of the main factors influencing the performance of M-REITs this year. REITs are expected to underperform in an interest rate upcycle environment, affected by outflow of funds arising from the narrowing of distribution yield and risk-free rates.

“At times like this, higher volatility in unit price is expected,” its chairman Datuk Jeffrey Ng Tiong Lip tells FocusM. “On a brighter note, we believe that the volatility will be contained, supported by low foreign unitholding and expected gradual normalisation in the interest rate hike [instead of sharp hike over a short period of time].”

As a result of consolidation in unit prices, MRMA expects distribution yield to decompress. The investment case will be attractive when distribution yields decompress to a level where the yield spread returns to an attractive level from acquisition perspective given vendors may be pressured to lower the asking price in order to match the decompressed yield.

Share price performance of Bursa’s REIT stocks

High vacancy rate

In the near term, AllianceDBS analyst Siti Ruzanna Mohd Faruk expects organic rental income to remain steady with flattish growth due to moderate reversions and the current weak consumer sentiment.

Tepid consumer sentiment has adversely affected the retail segment, in the form of lower retail spending, rental reversions, and visitor traffic. In light of the prolonged weak sentiment and sluggish growth in same-store sales, REIT managers have begun to negotiate tenancy renewals in advance at the expense of rental reversion.

“Any substantial improvement in net property income [NPI] growth will be driven by acquisitions and portfolio expansions,” she wrote in a 2018 market strategies. “While rental reversions from retail assets have moderated, they have remained in positive territory.”

However, the hospitality and office segments continue to struggle in filling up vacancies. To grow further, most REITs are looking at potential acquisitions with immediate earnings accretions to boost NPI and distribution per unit (DPU).

As for the office segment, although occupancy levels have been struggling to trend up, the average rental rates have been increasing due to the presence of more investment-grade properties as well as upgraded services and facilities provided in existing buildings.

“Nonetheless, the vacancy rate is still a worry faced by the office REITs as the average vacancy rate had remained high in H2FY17 at 19.8%, even after declining marginally from 21.7% in H2FY16,” cautioned Siti Ruzanna.

TA Securities Research expects the DPU of M-REITs to grow by 7.8% year-on-year (yoy) this year from a rather flattish increase last year (M9FY17: 3.4% yoy).

Other than the low base effect, the healthy growth momentum is expected to be driven by (i) higher rental post asset enhancement initiatives (AEIs); (ii) additional income stream from newly acquired assets, and (iii) better operational efficiencies.

“There could be potential upside to our DPU forecasts should domestic economic activities continue to gain traction,” wrote analyst Thiam Chiann Wen in a 2018 outlook on the REIT sector.


Share price playing catch-up

Although a 25 basis points (bps) increase in Bank Negara Malaysia’s overnight policy rate (OPR) is anticipated in the second half (H2), Thiam expects M-REITs to be largely insulated due to their high proportion of fixed-rate debt and low need to refinance.

This follows concerns that when interest rates rise, the ability of M-REITs to service debt comes under pressure as they have to commit 90% of their earnings as dividend.

“Note that about 80% of their borrowings are based on fixed rate financing,” she pointed out, noting that the recent decline in the Malaysian Government Securities (MGS) yield makes REITs an attractive investment option.

Kenanga Research’s analyst Marie Vaz pointed out that M-REITs’ share prices have yet to play catch-up despite a declining MGS (-4% YTD) which is likely due to investors’ perception of future earnings risk.

“However, we believe risk are minimal and has mostly been priced into our earnings and valuations,” she noted in the research house’s Q1 2018 investment strategy. “In light of stable fundamentals and MGS outlook, M-REITs are attractive at current levels, highly warranting outperform call.”

For investors seeking yields and flights to safety, this is backed by stable gross dividend yields of 4.8-6.9%, adds Vaz.

Popular M-REITs

SINCE the listing of Axis REIT in 2004, there are currently 18 real estate investment trusts (REITs) listed on Bursa Malaysia – including four shariah-compliant REITs – which account for 2.5% of the total market capitalisation. As of end-Dec, the market capitalisation for REITs stood at RM46.5 bil compared to just RM5 bil in 2007.

As of Jan 3, the most expensive M-REIT stock is KLCC REIT which was last traded at RM7.89 while the cheapest is AmFIRST REIT at 67.5 sen.

Based on their share price over a one-year period till Jan 3, only four stocks have posted gains. They are YTL Hospitality REIT (11.9%); Tower REIT(2.5%), Atrium REIT (1.8%) and MRCB-Quill REIT (1.6%) (see chart).

Another five M-REITs saw their stock prices declining over 10% during the one-year period. They are Hektar REIT (23%); Amanah Harta Tanah PNB (13.7%); KIP REIT (13.5%); AmFIRST REIT (12.3%) and Al-Aqar Healthcare REIT (10.8%).

M-REITs that are often found in the research universe include AmanahRaya REIT; Axis REIT; CapitaLand Malaysia Mall Trust; IGB REIT; MRCB-Quill REIT; Pavilion REIT; Sunway REIT, and YTL Hospitality REIT.


This article first appeared in Focus Malaysia Issue 266.