Widening spreads among REITs present opportunities in hospitality segment
KUCHING: The widening spreads among real estate investment trusts ( REITs) in Malaysia present investment opportunities particularly for hospitality REITs, says AmInvestment Bank Bhd ( AmInvestment Bank) in a strategy report for the second half of 2017.
This comes as the portfolio repositioning by foreign investors has led to inflows in Malaysian Government Securities ( MGS).
After peaking at 4.5 per cent, AmInvestment Bank observed that the 10-year MGS yield curve has flattened at the current level of 3.9 per cent.
“The positive sentiment is gradually returning, following two consecutive positive inflows of the MGS,” it said in a strategy report on the second half of the year.
“Recall since November last year, the MGS experienced outf lows for five consecutive mont hs from RM1 8 4 . 6 bil lion in October 2016 to a low of RM135.6 billion in March before rebounding to RM150.5 billion in May 2017.
“In view of the flattening of the MGS curve, the spread between REITs and MGS has widened, creating a pocket of opportunities for some REITs for further spread compression.
“As such, we are positive on the hospitality segment where the spreads are wide at 280 basis points (bps) compared to the other segment of REITS such as office, retail, industrial, diversified and healthcare of 240bps, 170bps, 150bps, 140bps and 120bps respectively.”
The research firm believed that the wide spreads of hospitality REITs are due to perceived risks of the extremely shortterm nature of the hospitality industry – as low as one- day lease.
It also said lower bond yields could result in a lower borrowing cost for REITs with lumpier refinancing, lower percentage of loans on floating rates and asset leverage.
“We pr ef e r RE IT s with st ronger balanc e sheets and lower asset leverage.
“On top of reduced exposure to borrowing rate spikes, lower asset leverage would provide more room for REITs to draw on cheaper debt for inorganic growth such as acquisitions.
“On the other hand, we may downgrade the REIT sector to underweight from neutral if the rental reversion is below our estimates – potentially due to challenges in business environment which will drag occupancies, better negotiating power by the tenants to reduce rentals and faster pace of interest rate hike by Bank Negara Malaysia which willdampen yield spread and increase the borrowing cost for REITs.”
REITs under our coverage are expecting a fair amount of tenancy expiries in 2017. Pavilion REIT and Sunway REIT are expecting lease renewals of 20 per cent and 22 per cent respectively in 2017.
Although sliding occupancy in retail space is a cause for concern, we believe Pavilion REIT and Sunway REIT will have smooth reversions in getting positive rental reversions although at low to mid- singledigit, given their positioning as strategic prime shopping malls.