CGS-CIMB Research stays Neutral on REITs due to CMCO

It said on Thursday it retained Add for Axis REIT due to positive rental reversion outlook (FY20F: +2%) and asset acquisition pipeline.

KUALA LUMPUR: CGS-CIMB Equities Research is keeping it Neutral stance on the real estate investment trust (REIT) sector given the cautious recovery outlook in 2H20F for the retail malls and hotel players, brought about by the conditional Movement Control Order (CMCO).

It said on Thursday it retained Add for Axis REIT due to positive rental reversion outlook (FY20F: +2%) and asset acquisition pipeline.

“We also maintain Add on IGB REIT, as its flagship neighbourhood malls are likely to stage a resilient but gradual recovery post-CMCO, ” it said in a research report.

“Downside risks: 1) extension of CMCO beyond the two-week period; 2) severe negative rental reversion for retail malls; 3) more subdued occupancy rates for hotels. Upside risk: strong recovery post-CMCO, ” it said.

To recap, the CMCO was reinstated for Kuala Lumpur, Putrajaya and Selangor for two weeks from Oct 14 to 27 following a spike in new Covid-19 cases.

“Although the CMCO is not a total lockdown, the more restrictive measures intended to deter social gatherings/activities and travel would have a direct negative impact on retail and hospitality REITs, ” it said.

Restrictions include: 1) social events - community/cultural; 2) entertainment – theatres, karaoke centres; 3) conferences and exhibitions – weddings fairs, tourism sales/carnivals; and 4) hotel facilities.

“We anticipate a stunted recovery in retail mall footfall and tenant sales, as the CMCO pours cold water on the encouraging recovery statistics observed by retail M-REITs since Jul. Based on our checks, retail mall footfall, on average, staged a 60-80% recovery rate vs. the pre-Movement Control Order (MCO) period in 1Q20.

“As for tenant sales, we anticipate a weakening tenant sales trend in 2H20F, on the back of the recent Covid-19 cases found at a number of malls in the Klang Valley, ” it said.

General observations by retail mall REITs indicate that the tenant sales recovery rate peaked around end-August but was still roughly below the levels seen pre-MCO in 1Q20.

“We believe CMMT would be most affected by the CMCO as retail malls make up 96% of its net property income (NPI) – downside risks to the NPI of its underperforming Klang Valley malls in 2H20F, ” it said.

CGS-CIMB Research said since early October, domestic travel patterns have begun to revert to a more cautious stance.

The Malaysian Association of Hotels expects the outlook for the hotel sector to turn negative in 2H20F given the resurgence of Covid-19 cases.

The association estimates a potential revenue loss of up to RM100mil in 2H20F on the back of a 10-15% fall in room bookings. Occupancy rates remain subdued and may fall to 20-25%, from c.39% currently.

“This may pose downside risk to earnings of Sunway REIT as hotel assets makes up 16% of its NPI. For KLCCP, there may be risks of wider losses for Mandarin Oriental KL – its sole hotel asset, ” it said.

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