REITS to see gradual recovery

Research house expects sector’s earnings to return next year

PETALING JAYA: A gradual recovery for the real estate investment trust (REITS) industry is expected from the fourth quarter of this year (4Q20) with earnings to recover only from next year.

UOB Kay Hian said this in a report, adding that it was forecasting the sector to contract about 19% for 2020 and earnings to jump 20% for 2021.

“Ten days into the recovery movement control order (RMCO) period, we observe that consumer sentiment continue to be weak. We expect gradual recovery from 4Q20 onwards,” it said.

The research outfit noted that three out of the seven REITS under its coverage disappointed in the recent financial results season, while the rest reported results that were in line with expectations.

“Retail and hospitality-centric REITS bore the brunt of the pandemic.

“Earnings were mainly affected by rental relief given, lower turnover sales, lower occupancy at hotels, and lower other income (car park and advertising),” it said.

Positively, offices were not impacted as badly compared to retailers, UOB Kay Hian added.

It added that in the current low interest rate environment, Malaysian REITS still commanded attractive yields compared with fixed income instruments.

“In the short run, office REITS are less impacted by the Covid-19 outbreak, but in the long run, we continue to prefer the retail segment, particularly in the prime/niche malls for their proven business resilience,” the research outfit said.

REITS, like most sectors reliant on consumer sentiment and spending, have taken a hit in recent months as the Covid-19 pandemic shut down most businesses and left some with job and pay cuts.

In the wake of such happenings, consumers have generally tighten their belts and consumer spending and sentiment have hit rock-bottom.

Although most businesses have now re-opened as the pandemic is now said to be largely under control in Malaysia, sentiment remains weak and concerns about recovery in businesses and the overall economy continue to linger.

Meanwhile, UOB Kay Hian said it expected prime retail malls to be able to weather the current situation better compared with mass retail malls.

“Even when the virus is contained, footfall will take a while to recover.

“Turnover revenue typically accounts for about 5% or less of total revenue for retail REITS in our coverage,” the outfit said.

It has revised its earnings for the companies to factor in more rental assistance and a slower-than-expected recovery.

“We have conservatively extended the duration of rent relief to retailers for some of the REITS and lowered our rental reversion in anticipation of a slower recovery,” it said, adding that it has kept the respective stock target prices relatively unchanged.