MCO extension to hurt REIT sector

  • Property
  • Friday, 27 Mar 2020

Negative impact: A shopping mall in Bangsar is almost empty due to the movement control order. Many retail businesses are in dire condition and desperately need help, more so with the extension of the MCO for a further 14 days.

PETALING JAYA: The extension of the movement control order (MCO) is expected to negatively impact the real estate investment trust (REIT) sector, especially businesses with retail assets.

Public Invest Research said, in a report, it has revised downward its fair values to factor in higher risk premium and impact from the MCO, especially on retail-based asset owners.

“We cut IGB REIT’s and Sunway REIT’s 2020 earnings by 10% and 13%, respectively. Correspondingly, we reduce the target prices for IGB REIT and Sunway REIT to RM1.72 (from RM1.95) and RM1.70 (from RM1.93) respectively.

“It is still too early to assess earnings impacts of the MCO on other assets such as offices, warehouses and logistics and hence, we keep our earnings estimates for Axis REIT unchanged for now.”

The MCO, which was originally scheduled to end on March 31, has been extended to April 14 to combat the Covid-19 pandemic.

Public Invest Research noted that some malls such as Sunway Malls and Pavillion Mall have announced a 14-day rent-free period for its non-essential retailers following the enforcement of the MCO from March 18 to 31 and could now be extended for another 14 days.

“As such, given the current weak consumer sentiment, we believe the REITs’ defensive attribute could be weakened further on higher risks of a credit crisis or a damaging recession.

“We maintain our neutral stance but reduce our fair value, especially for retail malls on earnings cuts and higher risk premium.”

The Malaysia Retailers Association (MRA) in a statement acknowledged that the MCO was already taking a toll on the retail sector.

“Sales dropped by as high as 60% in February and we envisage a 90% drop in March 2020, due to the lockdown. Many retail businesses are in dire condition and desperately need help, more so with the extension of the MCO for a further 14 days.

“The big questions are how are businesses going to survive? How are retailers going to pay rental? How are employers going to pay staff salaries?”

The MRA noted that during the global financial crisis in 2008, the problem was caused by decreasing asset values and increasing risks.

“However, with Covid-19, the contraction of the economy by deliberate government actions (done consciously, intentionally and necessarily) around the world has triggered a cashflow problem.

“Therefore, if this issue is not tackled as soon as possible, it will trigger a depression of asset values, income and further contraction of the economy.”

Public Invest Research said business volume, especially for retail and hotel businesses, have slowed substantially as the MCO only allowed for essential supplies and services.

These include supermarkets, pharmacies, convenience stores and telecommunication services, while food and beverage outlets may only cater to deliveries and takeaways.

“As such, we revise down our earnings forecasts to factor in the rent-free period and lower turnover rent for malls. As for hospitality business, we expect further drops in room occupancy and we believe this could go beyond the MCO period for the next few months.

“That said, we understand that various cost-cutting exercises are already underway to minimise the losses.”

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