CIMB Research sees limited returns from REITs

KUALA LUMPUR: CIMB Equities Research sees limited returns from the real estate investment trusts (REITs) and is maintaining its Neutral stance.

It said on Monday the Malaysian REITs (M-REITs) still lack catalysts while downside risks have largely been priced in, in its view. 

“Our call is supported by average CY18-19F dividend yields of 5.6%-5.8%, a discount to the three-year historical average dividend yields of c.6.4%. 

“Meanwhile, valuations have reverted close to its three-year average at c.1.2 times price-to-book value (P/BV) and therefore we believe there is little room for upside to the REITs under our coverage,” it said. 

CIMB Research said the Bursa Malaysia (BM) REIT index has fallen 11% year-to-date, with individual share prices of listed REITs prices moving within the range of -30% to +4%.

It said the decline in prices, especially in the beginning of the year, stemmed from cautious investors trimming positions due to perceived negativity from the hike in OPR in end-Jan as well as concerns surrounding the ability to maintain occupancy rates. 

This was then exacerbated by the rising 10-year Malaysian government securities (MGS) yields.

However, share prices of some M-REITs have recovered slightly post the 14th general election (GE) in May 2018 (Figure 3), which could be a result of some investors seeking a safe haven in M-REITs as markets became more volatile post GE14.

“However, the recovery has not resulted in share prices coming back to pre-OPR hike levels. While this may post an opportunity to accumulate, we advocate investors to remain selective,” it said.

CIMB Research said the 1Q18 results of M-REITs under its coverage were within expectations, with sector core net profit growth of 2% on-year and 6% on-quarter as most M-REITs posted higher earnings.

During the results season, it adjusted its valuation assumptions and cut FY18-20F forecasts for CMMT by -2% and for MQREIT by c.1%. 

It upgraded IGB REIT to an Add given attractive valuations at the time of upgrade and due to its prime retail assets and strong balance sheet. 

IGB REIT’s share price has risen 9.4% since its upgrade in April 2018.

“We project c.5% on-year earnings growth in 2018 on the back of moderate rental reversions, modest tenant sales growth and the need for a more defensive tenant retention strategy (i.e. rent-free periods, asset enhancements). 

“Nevertheless, concerns over the competitive landscape in the rental market will be partially offset by incoming contributions from accretive acquisitions as well as minimal lease expiry profiles in 2018. 

“We advocate REITs with: i) stable leases, i.e. prime retail and office assets on long-term tenancies, which can uphold positive rental reversions and sustain occupancy rates, ii) good AEI track records, and iii) strong sponsor backing.

“We believe the 10-year MGS yield, currently at 4.1%, should have stabilised as Bank Negara already hiked interest rates in January and the market has already priced in potential hikes by the US Federal Reserve. 

“However, we note that, especially post GE14, foreign investors are more sensitive to any adverse changes in the local economy (changes in source of the country’s revenue, potential credit rating downgrades), which could lead to a sell-off in MGS,” it said.
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