CIMB Research retains Neutral on REIT sector, lacks catalysts

  • Business
  • Tuesday, 14 Nov 2017

KUALA LUMPUR: CIMB Equities Research is maintaining its Neutral stance on the real estate investment trust (REIT) sector, as it still lacks catalysts, while downsides are largely priced in. 

It said on Tuesday its call is supported by average CY17-18F dividend yields of 5.2-5.4%, at a discount to the three-year historical average dividend yields of c.6.5%. 

“While the oversupply of office and retail space are still concerns, we think high-quality assets with continuous asset enhancement initiatives should be resilient in CY17F,” it said.

CIMB Research recently organised a REIT expert speaker session as part of CIMB’s Luncheon Series featuring property veteran Datuk Stewart LaBrooy, executive chairman of AREA Management Sdn Bhd.

“LaBrooy is of the view that the Malaysian REIT (M-REIT) sector is at the overbuilding and downturn phase of the REIT cycle, where owners are cashing in on high profits, resulting in overbuilding, rising vacancies and declining rent. 

“The rising 10-year Malaysian government securities (MGS) yields do not bode well for M-REITs as the premium of dividends over the MGS has narrowed significantly,” it said. 

The research house said LaBrooy advocates investors focus on M-REITs that offer visible growth and have clear accretive acquisition pipelines. 

He is of the view that the incoming retail supply has put pressure on retail assets and believes e-commerce is a looming threat. 

However, he thinks the market will continue to favour strategically-located prime malls (Suria KLCC, MidValley and Sunway Pyramid Mall), which have relatively stronger power to increase rental. He believes retail REITs should look into amalgamating retail and e-commerce. 

The industrial segment is the biggest beneficiary of the e-commerce boom and M-REIT players should tap into this segment, LaBrooy said. 

“He is of the view that this segment has a strong growth story through acquisitions, as well as organic growth, given the tight industrial space supply. The rapid growth of e-commerce, especially in APAC, is creating new high-value assets that are now coming on stream, he said. 

“LaBrooy expressed his concern over the fast-growing office floor space, which has led to rental rates pressure, especially in the Klang Valley. 

CIMB Research quoted him as saying a slowdown in the business expansion could further soften demand. 

But office assets with good connectivity to malls and transport hubs should still prosper and office REITs should look into diversifying their portfolios to include high-end offices, not only in Malaysia but abroad.   
Mall-centric REITs in Malaysia: CMMT, IGB REIT, Pavilion REIT, Sunway REIT, Hektar REIT.

What used to be the darling segment of the sector several years back is now in a much less favourable light given the oversupply of retail malls and looming threat of e-commerce. 

Marc Woo, Google’s Malaysia head of e-commerce, travel and financial services was recently quoted by the Bangkok Post as saying that Southeast Asia will be the next major boom market for e-commerce in Asia Pacific (APAC). 

Notably, the APAC e-commerce industry expanded a commendable 25% on-year in 2015.  

Savills Research shows that retail space has reached 8 sq ft per capita in Klang Valley, while in some areas like Petaling Jaya, it is more than 16 sq ft per capita. 

In 2016, the Greater KL area had a cumulative retail supply of c.60.2m sq ft and it is estimated that by 2019, this will grow to c.73m sq ft.  

“To tackle the challenges faced by the retail REITs, malls are shifting towards providing more lifestyle and F&B offerings, as opposed to just brick and mortar. 

“LaBrooy believes that retail REITs should set an e-commerce strategy in place. One possible way, he shares, is to amalgamate e-commerce with retail, i.e. using stores not only as a showroom or a retail centre but also as a mini distribution centre. 

“He also believes that retail REITs should look into acquiring distribution and logistics centres as this could create an end-to-end value chain for the consumers, all the way down to delivery,” CIMB Research said.

He, however, continues to see the larger and integrated malls in Malaysia outperforming their smaller, standalone counterparts.  

 Office-centric REITs in Malaysia: MRCB-QUILL REIT, KLCCP Stapled Group, AmFirst REIT, Tower REIT, UOA REIT, Amanah Harta Tanah PNIB (AHP) The office segment has also been hit by the looming massive incoming supply of office space. 

Industrial-centric REITs in Malaysia: Axis REIT, Atrium REI.T The industrial segment is a highly underinvested sector – stock availability remains tight while rental rates have been on the rise over the past two years (+30%). The demand and supply of the segment is driven by the e-commerce boom.  

LaBrooy believes that demand for new high-quality industrial assets will transform the segment, which has led to several new mega distribution centres which carry high price tags as retailers start turning to logistics. 

Notably, UK-based retailer Marks and Spencer is building a 900,000 sq ft distribution centre with one m products processing capability per day and will consolidate its 110 warehouses into just four.  

Thus, LaBrooy believes there is a strong growth story through acquisitions and organic growth in the industrial segment, which will also be further propelled by the growth of the e-commerce segment. 
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