REITs sector likely to have bumpy ride

AmInvest Research expects Pavilion Kuala Lumpur as well as Intermark Mall to continue maintaining high occupancy rates.

PETALING JAYA: The road ahead for the Malaysian real estate investment trust (REIT) sector is expected to be a bumpy one, according to AmInvestment Bank Research.

The brokerage has maintained its “neutral” outlook on the sector, mainly due to the high valuations of the REITs.

“We advise investors to buy on weakness,” it said in a note yesterday.

However, as for the retail REITs, AmInvestment Bank Research said the segment has remained resilient.

The outlook for retail properties, especially shopping malls, is expected to remain stable in the short to medium term.

“This is demonstrated by Pavilion REIT and Sunway REIT whereby both have high occupancy rates in their shopping malls.

“We believe the high occupancy rates are also due to strong management and brand names of the REITs, in addition to shopping complexes becoming one-stop centres, providing food and beverages and entertainment options,” stated the research house.

There are currently 18 listed REITs on Bursa Malaysia.

Based on Bloomberg data, the Bursa Malaysia REIT Index’s dividend yield has declined over the last few months, from 5.46% in February this year to 5.28% as of July 16.

MIDF Research analyst Ng Bei Shan told StarBiz that the REIT Index’s dividend yield has been on a downtrend as prices for some of the listed REITs have risen.

“When unit prices are up, yield comes down,” she said.

Year to date, the REIT Index has outperformed the benchmark FBM KLCI. The REIT Index has increased by 8.25% since January, while FBM KLCI declined by 1.28%.

The REIT Index’s 12-month trailing price-to-earnings ratio stood at 20.60 times.

According to Ng, Bank Negara’s move to cut the overnight policy rate by 25 basis points in May this year will benefit local REITs.

“Firstly, the cost of funding is lowered and secondly, the required rate of return will be lower. Not only that, the yield spread between REIT dividend yield and MGS yield widens, giving more upside.

“We’re currently having a “neutral” stance on the sector as we believe that most of the positive have been priced in. Our house economic team does not anticipate another rate cut by Bank Negara for 2019,” she said.