Will the HK strife cause investors to switch to Malaysian REITS?
Most investors likely to adopt wait-and-see attitude
THE political upheaval in Hong Kong that has been happening since June is seeing a particular favourite of global institutional investors – Singapore-listed real estate investment trusts (S-REITS) – being hit.
Earlier this week, it was reported that Festival Walk, a shopping centre in Hong Kong owned by Singapore-listed Mapletree North Asia Commercial Trust, suffered “extensive damage” caused by anti-government protesters.
The company’s stock fell close to 6% after the news broke and the firm, which generates over 70% of its revenue from Hong Kong, is now seeing its shares still reeling, and trading at a multi-month low after several downgrades by brokerages.
Analysts believe there could be more companies suffering the same fate, as there are other S-REITS which own Hong Kong properties.
The question now is, could closest neighbour, REITS in Malaysia, be a beneficiary as investors switch to them, given certain S-REITS’ rising risks as a result of being exposed to Hong Kong properties?
As of August 2019, 80% of S-REITS and property trusts own properties outside Singapore across Asia-pacific, South Asia, Europe and the US, according to information on the REIT Association of Singapore’s (REITAS) website.
There are 17 S-REITS with real estate portfolios entirely composed of overseas assets, it adds.
In contrast, most Malaysian-listed REITS – 18 in total on Bursa Malaysia – own only local properties.
No switch yet
“We don’t think there will be a switch, not yet at least unless there is a change in overall (investment ) strategy for institutional investors. It’s more of a wait-and-see situation,” says Aminvestment Bank Research analyst Thong Pak Leng who tracks a handful of Malaysian REITS.
While REITS, which are firms that manage a portfolio of properties such as malls, hotels and offices, have always been well-liked for their stable income and tax incentives, the current low-interest rate environment globally, which translates into yield scarcity, have had investors chasing this asset class even more of late.
S-REITS, in particular, have been a firm favourite. Currently, there are 45 S-REITS and property trusts totalling a market capitalisation of about S$100bil, REITAS says.
Singapore has the largest REIT market in Asia (ex-japan) and is increasingly becoming a global REIT hub, according to the association.
From January to June this year, reports indicate that global institutional investors bought close to S$400mil worth of S-REITS, sending stock prices up by almost 20% and beating Singapore’s main stock index which was up 9% over the same period.
Comparatively, the Bursa Malaysia REIT Index was up about 7% from January to June while the local benchmark index FBM KLCI increased less than 1% over the same period.
Dividend yield-wise, S-REIT investors are obtaining returns of between 5% and 6% per annum.
This is around the same as what an investor of Malaysian REITS is getting.
“From this (yield) perspective alone, they’re pretty much the same but Singapore remains a more competitive market than Malaysia, plus there is the currency factor.
“So if there is to be any switch, I think investors will sell the S-REITS which have exposure in Hong Kong and switch to other S-REITS, as there are many choices in Singapore,” says another analyst who follows developments in the sector.
In Malaysia, some analysts favour Axis Real Estate Investment Trust (Axis REIT) and Capitaland Malaysia Mall Trust (CMMT) among the 18 companies.
Kenanga Research analyst Marie Vaz says she likes Axis REIT and cites its longterm earnings stability, being heavily involved in the industrial segment which allows for long-term leases of six to10 years as opposed to two to three years for the retail and office segments, as one of the reasons.
It is also one of the few Malaysian REITS with continuous inorganic growth through acquisitions, and is one of two syariah-compliant REITS under Kenanga’s coverage, making it a favourite among institutional investors, she points out.
“All in, for its earnings stability and solid management, we believe Axis REIT’S current yields of 5.2% are attractive.”
“We like CMMT for its above average yields of 6.4% at current levels (versus 5.5% industry average),” she says, adding that notably, CMMT’S assets are under heat.
“But we believe we have priced in most earnings risk as results have consistently met our expectations.”
Vaz in a sectoral report last month told clients that the fundamental outlook for Malaysian REITS “remained unexciting on stable but uninspiring reversion rates due to the oversupply of retail, office and hospitality spaces”.
“We are comfortable with our ‘neutral’ call for the sector as we believe it still holds firm, given earnings stability over the past two years, while most negative news or foreseeable upsides in valuations have already been accounted for.
“At current levels, Malaysian REITS under our coverage are offering average gross yields of 5.5%, which we deem as decent. However, CMMT stands out on above-average yields of 6.4% even after accounting for foreseeable downsides.”