‘Revenge spending’ to propel M-REITs as economy gradually re-opens

MALAYSIA’S real estate investment trusts (M-REITs) sector is poised for steady recovery, boosted by both the retail and hotel segments amid relaxation of the movement control order (MCO).

Moreover, with the eventual re-opening of inter-state borders, gradual respite from domestic holiday-goers as well as business travellers can be expected, thus spurring a recovery in hotel occupancy, according to Hong Leong Investment Bank (HLIB) Research.

“With the Government allowing interstate travel activities between recovery MCO (RMCO) states (March 10), hotel occupancy rates were seen to increase to 33% from the lower rates in January (20%) and February (18%),” observed analyst Farah Diyana Kamaludin in a REIT sector update.

“We also foresee continuous improvement in the retail segment aided by relaxation of restrictions and pent-up local demand backed by ‘revenge spending’ and upcoming festive season (Hari Raya).”

Moreover, the continuation of 10% electricity tariff rebate (till June this year) would aid in reducing operating costs.

“While rental assistance would still be offered to affected tenants, we understand that the quantum is reducing,” suggested HLIB Research.

“Furthermore the national vaccination programme (which should gain significant traction in 2H 2021) would drive up overall sentiment as we progress on the path to normalcy.”

Meanwhile, the office and industrial segments are expected to remain resilient. As the economy slowly recovers, more employees are gradually return to work, thus raising the demand for office space for the rest of the year.

“As for industrial REITs, the segment has been steady all along, backed by exceptional growth of the e-commerce sector that was seen during the pandemic,” opined the research house.

“We observed that as online shopping becomes the new norm, it has created a strong tailwind for warehousing and logistics companies. Hence we believe industrial REITs will continue its stability and growth trajectory in 2021.”

Elsewhere, with Bank Negara Malaysia expected to maintain its overnight policy rate (OPR) at 1.75% for the rest of 2021, HLIB Research reckoned that the current low level of OPR would be favourable for REITs.

“This will give REITs the advantage of having lower borrowing costs for future acquisitions,” justified the research house.

All-in, HLIB Research maintained its “neutral” rating on the REIT sector with its top pick being Axis REIT (target price: RM2.48) given the company’s strong resiliency throughout the pandemic, “driven by increased popularity in industrial properties, high occupant tenancy in its diversified portfolio as well as being one of the few Shariah-compliant REITs”. – April 13, 2021

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