REIT sector’s earnings per unit may slide 14%: Affin Hwang

PETALING JAYA: The partial shutdown of shopping malls and hotels due to the Covid-19 outbreak and the movement control order (MCO) is likely to cause a steep 14% decline in earnings per unit (EPU) for the REIT sector, according to Affin Hwang Capital.

The expected fall is also partly due to weakened consumer and business sentiment on the back of a slump in global equities and commodities, which will weigh on rental growth rates for all property classes.

In view of the challenging business outlook and unexciting 2021 distribution yield of 5.6% (excluding YTL REIT), Affin Hwang has downgraded its call on the sector to “neutral” from “overweight”.

The research house opined that landlords will eventually announce some rental rebates on a case-bycase basis after enduring a lower foot traffic in February and early and the MCO from March 18 to 31.

“We have cut our earnings forecasts for all retail-REITs under our coverage, incorporating minimal turnover rent for 2020 and 4% rental rebates for the year.” The hospitality industry has been the hardest hit by the reduction of travellers and event cancellations in February and early March followed by the MCO.

“Broadly, we expect the hospitality-REITs to only achieve the minimum rental guaranteed under their master leases (YTLREIT’s Malaysia operations, Sunway REIT); for those without master leases (KLCCSS’ Mandarin Oriental), we expect the hotels to achieve operating breakeven for 2020.”

Meanwhile, the impact on offices, warehouse/logistics will be indirect.

“In light of the challenging economic outlook, we have cut our rental growth rates for the office, warehouse and logistics assets. For leases expiring in 2020-21, we now expect the rental to contract by 2% to 5% (from 0% to 2% growth). As a result, we are cutting Axis REIT’s 2020-22 EPU forecasts by 3-6%.”