Higher gearing limit a boon for M’sian REITs

REITs Malaysia

PETALING JAYA: The temporary increase in gearing limit will provide Malaysian real estate investment trusts (REITs) with better cash flow flexibility, amid the challenging operating environment during the Covid-19 pandemic.

AmInvestment Bank said in a report that REIT managers would also be able to manage their debt and capital structures more efficiently following the gearing limit increase.

“Based on the latest financial results, REITs under our coverage namely YTL REIT and Pavilion REIT have gearing of 40% and 30%, respectively, while KIP REIT’s gearing stands at 34%.”

The Securities Commission has temporarily increased the gearing limit for local REITs to 60% from 50%, up to Dec 31,2022.

Maybank Investment Bank Research (Maybank IB) said it is “neutral” on the temporary regulation change.

“Although we do not discount the possibility of higher REITs gearing in 2020 due to devaluation of property values (attributed to the Covid-19 pandemic that resulted in significant rental income drop), we note that majority of local REITs do not possess high gearing, ” it said in a report.

The research house said seven out of 18 REITs have gross gearing above 0.4-times, out of which only two have gross gearing of above 0.45-times, namely Al-Salam REIT and AmFirst REIT.

“Meanwhile, we believe most REITs would maintain their prudent capital management and would not be aggressively acquiring assets (via debt funding) in conjunction with the temporary regulation change.”

Maybank IB said it liked Axis REIT for its industrial asset exposure, which entails resilient rental income and lower occupancy risks.

Additionally, the research house said it remained cautious on the oversupply of retail and office space in the Klang Valley, which could exert pressure on occupancy rates and/or positive rental reversions.

It said this, in turn, could increase the downside risks to distribution per unit (DPU).

“We believe interest rate hikes would lower REITs’ profitability (higher finance costs) and deter acquisitions (more expensive to fund acquisitions via borrowings).”

Meanwhile, TA Securities in an earlier report said the new normal of social distancing may pose pressure to 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 movement control order period, should the global lockdowns and international border controls remain in effect.”

Pursuant to the business disruptions arising from the movement control order, the research house said it expected 2020 DPU to come in substantially lower than last year, caused by substantial loss of income for the retail and hospitality segments.