MREITs to deliver better results in 2021 after a challenging year

PETALING JAYA: While 2020 has been a challenging year for Malaysian Real Estate Investment Trusts (MREITs), the sector is expected see some recovery in 2021 as movement restriction orders are eased and the deployment of Covid-19 vaccines lift consumer sentiment, according to research analysts.

AmInvestment Research, in its 2021 strategy report, has upgraded its rating on the sector to “overweight” from “neutral” previously, and said the worst is over for REITs.

The research unit opined that for the next 12 to 18 months, REITs will be broadly on a recovery path as consumer spending and footfall recover.

It pointed out that retailers are consolidating their physical footprint (with some focusing more on online expansion while others embark on costs rationalisation after a fall-off from oversupply of retail spaces).

This can be seen from the REITs’ strong occupancy rates of over 90% in their anchoring malls even during the movement control order (MCO) period.

Meanwhile, TA Research expects 2020 distribution per unit (DPU) for the REITS under its coverage to plunge 36% year-on-year (y-o-y), caused by substantial loss of income for the retail and hospitality segments.

However, the research unit said the DPU should grow by 11% y-o-y in 2021, driven by contribution from assets post-renovations (Capitaland Malaysia Mall Trust or CMMT, and Sunway REIT), newly acquired asset (Sunway REIT), relaxation of movement restrictions, better operational efficiencies and lower finance cost.

TA Research also noted that MREITs have been more prudent with their capital management, with CMMT’s and Sunway REIT’s latest gearing standing at 33.9% and 40.9%, respectively.

RHB Research has maintained its “neutral” rating on the sector and pointed out that the respectable quarter-on-quarter growth by all REITs in their third quarter results is not expected to be sustained into the fourth quarter, and possibly into the first half of 2021, as the current conditional MCO is likely to be extended further – considering the still high number of positive Covid-19 cases.

It noted that in the retail sphere, results were down on a y-o-y basis, for both the third quarter of 2020 and the first nine months in 2020, on the back of rental assistance granted to tenants.

Also, for the sake of tenant retention, rental reversions may have fallen flat – or negative, in more dire cases – for the leases due for renewal at many shopping malls.

RHB Research expects recovery in the retail sphere to be more conservative in the following quarters – with the exception of those with high-quality assets, and a more domestic shopper profile.

The research unit expects the REITs to register a poor set of results for the fourth quarter due to the ongoing CMCO, following the commendable pick-up in the third quarter, and to be followed by paced growth in 2021.

It reiterated its bearish stance on the hospitality segment, in view of the travel restrictions in place.

The research unit opined that overall occupancy rates will remain disappointing going into 2021, for as long as international borders remain closed.

Meanwhile, MREITs’ yields are relatively unattractive as the overnight policy rate is likely to stay put in 2021. If the 10-year Malaysian Government Securities yields is flat, this would entail the narrowing of yield spreads in the event that investor interest in MREITs returns.

Yield spreads between the MREITs under RHB Research’s coverage and the 10-year MGS are currently trading at around 175 basis points and the research unit opined that even with the expectation of minimal rate hikes this year, the yield spread may narrow further.

While Covid-19 vaccine news flow will likely see REITs’ share prices moving ahead of fundamentals, the risks surrounding the distribution of the vaccine may not pave the way for an actual swift recovery, in terms of consumer sentiment and retail spending.Meanwhile, the office segment is showing relative stability against the backdrop of a supply glut, with occupancy rates for MRCB-Quill REIT staying largely unchanged at more than 90%.

With the disposal of Quill Building 5, the occupancy rate should be even higher.

RHB Research also said MREITs’ balance sheets are largely strong, with average gearing standing at 31%.

MREITs’ assets would have to see a significant write-down in value, by close-to-half, before the gearing threshold is breached.

Although such drastic devaluation is possible for small-to-mid-sized retail malls or office buildings struggling to retain tenancy, RHB Research said the asset values of prime retail malls and office buildings should remain relatively stable moving forward.

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