Analysts expect minimal impact on MREITs from potential OPR hike
KUALA LUMPUR: Malaysian Real Estate Investment Trusts (MREITs) will not likely be affected by a potential overnight policy rate (OPR) hike, analysts project.
The research arm of Kenanga Investment Bank Bhd’s (Kenanga Research) in-house economist expected one OPR hike of 25 basis points (bps) in 2018 and also believed there is possibility of a second 25bps OPR hike.
However, Kenanga Research believed the impact to MREITs’ earnings is negligible as most MREITs under its coverage have the bulk of their borrowings on fixed rates (more than 70 per cent of total borrowings on fixed rates), save for Pavilion REIT (PAVREIT) (21 per cent of total borrowings on fixed rates), MRCBQuill (MQREIT) (21 per cent of total borrowings on fixed rates and Axis REIT (AXREIT) (37 per cent of total borrowings on fixed rates).
“Even so, impact to earnings is minimal, as a 50bps hike to PAVREIT, MQREIT and AXREITs’ borrowings would only lower earnings by one to two per cent, which is insignificant,” it said.
Valuation wise, Kenanga Research did not expect a negative impact to the 10-year Malaysian Government Securities (MGS) as there has not been a strong correlation between 10-year MGS yields and OPR rates in the past (less than 20 per cent correlation) as the MGS is also affected by other macro factors (which are US interest rate hikes, carry trade story) due to its high foreign holdings at circa 45 per cent,
Additionally, the research arm noted that a 25bps hike will affect the shorter term MGS rates more (which are three, five and sevenyear MGS) due to its thinner spreads.
As most MREITs are highly institutionalised with most investors accumulating at initial public offering (IPO) levels at low holding cost, the research arm believed a sharp sell-down from an OPR hike is unlikely.
Meanwhile, based on the updated article in The Edge on ‘Govt softens stance on luxury property freeze’, Kenanga Research highlighted that it appears that the government has softened its stance on freezing approvals for luxury projects with units above RM1 million, but will need more convincing on why the developments should move forward.
“The Second Finance Minister Datuk Seri Johari Abdul Ghani mentioned that property developers can proceed with plans to build offices and malls provided there is good justification.
“We initially expected the freeze to be a long-term positive as it alleviates oversupply fears, which bodes well for MREITs,” the research arm said.
However, with a softer stance on the ruling going forward, Kenanga Research was neutral on this news in the near term as it dampens investors’ sentiments.
In the longer run, the research arm hoped that the government will be able to mitigate the oversupply issue through active monitoring of new applications.
“We reiterate that investors have an overly negative perception of high incoming supply of retail spaces as shopper traffic will still gravitate to landmark malls due to the activities and offerings provided, not to mention centralised locations.
“We believe the retail spaces at risks are neighbourhood malls.”