PETALING JAYA: The overnight policy rate (OPR) cut is expected to have a minimal impact on local property players, especially real estate investment trust (REIT) companies, which are anticipated to continue being resilient.
Affin Hwang Capital, in a report yesterday, said most REITs under its coverage, namely, Axis REIT, IGB REIT, KLCC and YTL Hospitality REIT, had 70% of their borrowings pegged at a fixed rate.
The research house said other REITs, such as Pavilion REIT and Sunway REIT, had fixed rates for 43% of their borrowings.
“As such, we expect the latest OPR cut to have a muted impact of less than 1% on the Malaysian REITs’ 2020 earnings.”
On Tuesday, Bank Negara cut its OPR by another 25 basis points to 2.50%, the lowest level since June 2010. In the long run, Affin Hwang Capital said a lower OPR should reduce the local REITs’ finance costs and lift earnings.
It added, however, that the impact on near-term profit would be minimal.
“Given the OPR cut and declining global government bond yields, we expect the 10-year Malaysian Government Securities yields to remain compressed, which should in turn drive investor demand for alternative yielding assets such as REITs.”
In light of the Covid-19 outbreak, Affin Hwang Capital said it liked Axis REIT for its industrial/warehouse portfolio and strong management.
“Axis REIT’s revenue and profitability are relatively shielded from the ongoing Covid-19 outbreak due to its low exposure to the hospitality and retail sectors.
“In view of this added advantage, we are raising Axis REIT’s discounted dividend model-based derived 12-month price target to RM2.07 (from RM1.97) after incorporating a lower cost of equity of 7.6% (from 7.9%); and KLCC for its highly defensive earnings/sustainable yield.
“Key sector downside risks include weak retail spending, lower economic growth, lower tourist arrivals and reversal in the global yield trend.”
Meanwhile, AmResearch in its report on the property and REITs sector said developers generally reported lower new sales year-on-year by about 6.8% in 2019, mainly due to slower market conditions.
“Hence, we do not expect to see surprises in earnings over the next 12 to 18 months. Developers are more aggressive in clearing unsold units by offering discounts with the inventory level on a declining trend.
“However, we believe that this is a positive move to realise cash flow.”
On the REITs segment, AmResearch said the outlook for retail properties, especially shopping malls, would remain stable in the medium term.
“Shopping malls and hotels are poised to gain from the recent stimulus measures with a 15% discount in monthly electricity bills for six months from April until September 2020, while at the same time shopping malls are also encouraged to reduce rentals of their tenants and hotels to offer discounts to customers.
“We reckon the impact to our retail and hospitality REITs to be minimal.
“This is because we believe that the hotel and shopping mall players would be able to manage the reduction in cost and revenue efficiently.”
The research house said it may upgrade its neutral stance on the property sector to “overweight” if banks eased lending policies on properties; or if consumer sentiment improved significantly.
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