REITs likely to eye greenfield, brownfield projects

KUCHING: Real estate investment trusts ( REITs) are likely to eye more greenfield and brownfield projects as they are getting more common for their portfolios.

Besides the ongoing look out for yield accretive assets, MIDF Amanah Investment Bank Bhd ( MIDF Research) believed REITs are expected to participate in greenfield and brownfield projects more actively.

“Notably, Axis REIT has handed over Axis Mega Distribution Centre to Nestle and is working on the Axis Aerotech Center, Subang with a development cost of RM74.2 million, which is expected to be completed by the last quarter of 2018,” it said in sector outlook.

“Meanwhile, Sunway REIT is expanding Sunway Carnival’s NLA by 330,000 sq ft or 66 per cent over three years. Also, in August, Pavilion REIT announced that it was invited by Malton Bhd to participate in the on-going development of Pavilion Bukit Jalil. No indicative value was mentioned.

“We believe that REITs will look into greenfield or brownfield development as another way of adding value to their portfolios on top of outright purchases of completed assets.”

Revised REITs guidelines by Malaysia’s Securities Commission that took effect on April 9, 2018 could be one of the reasons to spur the participation of REITs in development projects going forward, said the research firm.

Recall that the revised guidelines since the previous version released on December 28, 2012, now allows for REITs to undertake property development activities that caps the investment value at 15 per cent of the REIT’s total asset value.

“We believe that this revision provides an additional option for REITs to seek yield accretive investments on top of purchasing and refurbishing properties,” it added.

This comes as core net income (CNI) of the six out of the seven REITs under MIDF Research’s coverage were in-line with its full year forecasts.

“Among them, Pavilion REIT’s CNI for the quarter was lightly above our expectation due to higher than expected rental income, recording 11.8 per cent yo-y growth,” it said. “For the second quarter, five REITs under our coverage registered positive CNI growth except for KLCC Stapled Group, which was flat, and CMMT at minus 16 per cent y-o-y.

“Overall, most REITs recorded higher earnings for the cumulative period except for CMMT due to the negative rental reversion from its Klang Valley malls.”

This led MIDF Research to retain most of its assumptions as most of the earnings for REITs under its coverage were in-line.

Meanwhile, Malaysia’s Government Securities ( MGS) yield averages at about 4.05 per cent. MIDF Research saw that the current 10-year MGS yield climbed a little compared to the average of four per cent in the previous quarter but is still considered accommodative.

“The spread of 1.35 ppt between the average dividend yield of REITs under our coverage and the MGS yield is unexciting at the moment.

“We maintain neutral on the REITs sector due to the lack of near-term catalysts.”