SINCE succumbing to a sell-down in 2020 amid the COVID-19 pandemic outbreak which severely hit retail REITs as people avoided going to shopping malls, Bursa Malaysia’s real estate investment trust (REIT) sector has been on a downslide, culminating in the KL REIT Index hitting a multi-year low of 754.34 points on March 18.
But MIDF Research expects the dark clouds to soon pass with a recovery in store for the REIT sector in tandem with the global economy recovering from the COVID-19 pandemic amid a ramped up of inoculation programme.
“The decline in KL REIT Index could also partly be attributed to the rising 10-year Malaysian Government Securities (MGS) yield to above 3.75% in March as rising MGS yield reduces the attractiveness of REIT’s yield,” observed analyst Jessica Low Jze Teing in a sector update.
“We expect retail REITs to benefit from economic recovery as footfall at shopping malls recovers. Nevertheless, we reckon that rental reversion of shopping mall to remain flattish in 2022 as tenant sales take time to recover.”
Moving forward, MIDF Research also expects rental reversion to return to positive territory in 2023 for established malls in Klang Valley such as Mid Valley Megamall, Pavilion KL, Sunway Pyramid and Suria KLCC.
This further prompted the research house to upgrade Bursa Malaysia’s REITs sector to “positive” from “neutral”.
“We see the worst is over for the sector with the sector poised for recovery in 2H 2022. Despite the negative impact of COVID-19 pandemic, REITs have weathered the storm and outlook is expected to improve in the near-term,” observed the MIDF Research.
“Besides, we think that the sector could be viewed as a safe haven amid the Russia-Ukraine tension. Our top picks for the sector are IGB REIT (“buy”; target price: RM1.72) and Sunway REIT (“buy”; TP: RM1.55) as we think that both REITs should benefit the most from the re-opening of economy and country borders.
“Their flagship malls namely Mid Valley Megamall and Sunway Pyramid should see strong recovery in footfall and tenant sales in FY2022.”
Elsewhere, MIDF Research also expects malls that are tourist hotspots such as Pavilion KL and Suria KLCC to also benefit from the re-opening of country borders as shopper footfall at the malls is expected to improve.
“We estimate average distribution yield of REITs to remain attractive at 5.1% and 5.4% for CY2022 and CY2023 respectively which is higher by 140 basis points than 10-year MGS yield of 3.7%,” projected the research house.
“We forecast the distribution yield of REITs to recover in CY2022, premised on earnings recovery of REITs. Meanwhile, we adjust the target prices for REITs under our coverage as we roll-over our valuation base year.”
Corresponding to the adjustment in target prices, MIDF Research upgraded IGB REIT, Sunway REIT and Pavilion REIT to “buy”. “We opine that the improving outlook for retail
should result in positive re-rating of retail REITs with established malls in Klang Valley,” added the research house. – March 28, 2022
