Low interest rate environment good for REITs

Quality assets: Prime malls and megamalls will recover sooner than neighbourhood malls.

THE low interest rate environment is expected to bode well for local real estate investment trust (REIT) players, due to the lowered required rate of return and borrowing cost.

MIDF Research in a recent report states that while this might be the case in theory, the yield spread is unlikely to remain attractive at the moment.

“Identifying and purchasing the right property that fits into the portfolio at the right price will be something that REIT managers will focus on. Based on channel checks, the impact of lower interest rates on borrowing costs is minimal thus far. In the near-term, we expect REITs’ core net income to have a bigger impact on their unit price performance.”

Bank Negara’s monetary policy committee cut the overnight policy rate by 25 basis points to 1.75% last week, as it expects the reduction to help speed up economic recovery.

Looking past the earnings expectation for the next few quarters, MIDF Research says assets matter for longer-term potential, as good assets are likely to rebound from the challenging operating environment eventually. Additionally, the research house says it expects performance in the second quarter to be worse than the first quarter.

“As the movement control order (MCO) was extended, hurting non-essential services tenants, we expect the second quarter of 2020 to be more challenging than the first quarter. In the first quarter, we saw IGB REIT, Sunway REIT, Pavilion REIT and Capitaland Malaysia Mall Trust (CMMT) reporting earnings that were below expectations.”

Although offices were not affected immediately, MIDF Research says it does not rule out that asset owners may assist tenants by giving rebates to help them through the challenging times at the moment.

“We expect rental assistance programmes to abate for good-quality assets in the third quarter of 2020, as these malls are likely to recover sooner in terms of footfall and sales turnover.

“As such, we prefer prime malls and megamalls over neighbourhood malls. On another note, malls that receive a high ratio of tourist shoppers may still be impacted in the third quarter, as the reopening of borders for international travellers remains uncertain for now.”

Meanwhile, TA Securities says it expects the new normal of social distancing to pose pressure on occupancy rates and rental reversion prospects for the retail segment in the immediate quarters.

“We also believe mall owners will review tenants’ requests on a case-by-case basis and will provide appropriate rental support to non-essential retail tenants during this difficult period. As such, the rental relief/support set aside for affected tenants is expected to weigh down the REITs’ performance in the coming quarters.

“As for the hospitality business, we expect further declines in room occupancy and we foresee this could go beyond the recovery MCO (which tentatively ends on Aug 31) period, should global lockdowns and international border controls remain in effect.”

Separately, TA Securities says the 15% discount in monthly electricity bill for a period of six months, as proposed in the 2020 economic stimulus package, is expected to enhance Sunway REIT’s and CMMT’s net property income by 0.5% and 1.5%, respectively.

“On a broader perspective, the widespread cash distributions across B40 and M40 announced in the latest stimulus package should help to support retail sales.”

Pursuant to the business disruptions arising from the MCO, TA Securities says it expects 2020’s distribution per unit (DPU) to come in lower than 2019, caused by loss of income for the retail and hospitality segments. “This year, REITs will focus on cash conservation, cost containment and re-prioritising non-essential capital expenditure. We expect DPU to shrink by 26% in 2020.”

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