Limited upside on MREITs after share price rebound

KOTA KINABALU: Following a recent share price rebound by Malaysian Real Estate Investment Trusts (MREITs), the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) believed the sector will be see limited upsides as their yield spreads and valuations gaps have narrowed to less attractive levels.

“Previously, the yield spread between MREITs and Malaysian Government Securities (MGS) was widened to about 2.3 percentage point (ppt).

“However, this has changed following the uptrend of MGS yield, which now averages at 4.0 per cent year to date (YTD) compared with 3.95 per cent back in the first quarter of the year (1QCY18),” said the research arm in a recent sector update.

The change has left the current spread to be just under 0.7 points and while MIDF Research maintains their MGS yield assumption of 4.0 per cent for the year, they have noticed that the spread between MGS yield and REITs under their coverage have narrowed to a less attractive level.

According to MIDF Research’s report, all of the MREITs under its coverage have seen positive price changes since their last sector report on April 10.

Axis REIT experienced the largest price change at 21 per cent; this was followed by Sunway Reit with 12 per cent; CCMT with 10 per cent; IGB REIT, KLCCP and Pavilion REIT at 9 per cent; and Amanahraya REIT at 3 per cent.

While MIDF Research is anticipating that REITs earnings will still be resilient in the near-term, the recovery in unit prices of circa 3 to 21 per cent since their last report has narrowed the valuation gap and prompted them to downgrade their ‘Overweight’ call on the REIT sector to ‘Neutral’.

Looking forward, MIDF Research opines that the performance of REITs in the second half of the year could be better given that the upcoming Raya celebration and following World Cup 2018 event is expected to result in higher footfall in major malls that usually organize crow pulling events and promotions.

“The reduction of GST from six per cent to zero starting June 1 should also spur consumer spending, which could spill over to shopping malls.

“We expect malls at strategic locations to command singledigit positive rental reversion while growth for rental reversion for neighbourbood malls may be tepid or flat,” added the research arm.

Their top picks for the sector are Sunway REIT due to its positive earnings outlook and positive rental reversion from Sunway Pyramid and growth from its hotel division; AmanahRaya REIT due to its diversified assets and earnings; and IGB REIT for its ability to command positive rental reversion for Mid Valley Megamall.