LOCAL real estate investment trust (REIT) players, having come out of arguably one of the toughest economic environments last year due to the Covid-19 pandemic, are cautiously optimistic of their prospects for 2021.
Axis REIT, in its recently released 2020 annual report, says people and businesses are increasingly adapting to the new normal, adding that as countries begin rolling out Covid-19 vaccination programmes, there is optimism for a sustainable recovery in business activities and the broader economy.
“Yet, while we look forward to putting the Covid-19 pandemic behind us, we are cognisant of the continued risks. At the time of reporting, Malaysia had experienced a spike in Covid-19 cases which has necessitated the imposition of a protracted movement control order. This, in turn, threatens to dampen business activities and the anticipated economic recovery in 2021.”
The company adds that the emergence of Covid-19 clusters among manufacturing workers also highlights how even industrial operations and tenants might still be susceptible to unscheduled disruptions.
“In all this, we are vigilant in monitoring the situation and the potential implications on our tenants’ and our operations and we remain on standby to formulate and deploy further Covid-19 response initiatives, as and when necessary.”
Axis REIT primarily owns and invests in office and industrial real estate properties. It also manages a couple of hypermarkets.
Notwithstanding the elevated economic and pandemic-related risks, Axis REIT says it remains confident over the outlook of the industrial property segment.
“This is premised on sustained demand for manufacturing and industrial facilities, supported by accommodative and investment-friendly policies and incentives that will continue to draw direct investments into the manufacturing sector, as well as rising demand for warehouses and logistics facilities amid accelerating e-commerce trends.
“Meanwhile, the broader office segment continues to experience pronounced pressure on rental rates and occupancy levels amid unfavourable demand-supply conditions, particularly in the central Kuala Lumpur City area.”
However, Axis REIT says it expects better resilience in Petaling Jaya, where its office portfolio is concentrated, given its wider tenant profile and the improved transport infrastructure around the Klang Valley that continues to support demand in decentralised locations.
Meanwhile, Pavilion REIT, which specialises in retail and office property sectors, says in its 2020 annual report that both segments are expected to remain challenging in 2021.
Nevertheless, the group says the announcement of the start of vaccination programmes in various countries and the likely availability of Covid-19 vaccines to the public in Malaysia, could lead to a recovery in economic activities that could then result in positive economic growth and a return of investor and consumer confidence.
“The improvement in overall sentiment and recovery of the business sector would then provide a boost to the retail, hospitality and office property sectors although there are other factors, which may hamper a full-scale recovery such as the political uncertainties still grappling the country as well as issues of oversupply and declining occupancy rates in both the retail and office property sectors.”
Pavilion REIT says the office and retail-based REITs will have to contend with issues of reduced demand and oversupply of space over the next few years.
“Hotel-based REITs meanwhile will have to hope that the restrictions on inbound travel from overseas will be lifted soon and the tourism industry will be able to recover speedily.”
UOA REIT meanwhile says it will seek to diversify its real estate portfolio by property and location type.
“The group will focus on investing in properties that are primarily used for office, retail and/or residential purposes and will continue to look for opportunities in these types of properties.
“In addition, it may also look into other properties that will provide attractive risk-adjusted returns, ” UOA REIT says in its recently released 2020 annual report.
UOA REIT’s assets comprise commercial properties.
Meanwhile, IGB REIT, which operates The Gardens Mall and Midvalley Megamall, says it expects the operating landscape to be challenging in 2021.
“The retail sector is again challenged with the rising cost of doing business, lower sales and weaker cashflow.
“Retailers who try to pivot to e-commerce or online platforms were at most mitigating revenue loss, ” the company says in its 2020 annual report.
UOB Kay Hian in a recent report says REITs still command attractive yields, compared with fixed income instruments in the current low interest rate environment.
“The high yielding and Covid-19 resilient office REITS offer better interim gains via dividend yield compression. However, in the long run, we continue to prefer the retail segment, particularly prime/niche malls for their proven business resilience.
“As vaccines are disseminated, we expect earnings to recover starting with tenant sales as the economy opens up. However, rental reversion will be minimal.”
Unlike the mass retail market, the research house says prime retail malls will be able to weather the current situation better, given their proven business resilience.
“Furthermore, in the eventual reopening of international borders, prime retail malls like Pavilion KL will benefit. The main concerns include the rapid emergence of e-commerce and oversupply of retail space.”
It adds that offices in strategic locations continue to be resilient.
“Although the industry is still grappling with oversupply, we believe selected office REITs (located in strategic locations with good connectivity like KL Sentral) will benefit from higher demand for office space amid the need for physical distancing.
“Moreover, the average rental rates in KL Sentral are attractive at RM6.55 per sq ft.”
UOB Kay Hian says there will be dividend yield compression play as earnings substantially recover in 2021.
“REITs offer relatively attractive yields of between 5% and 9% for 2021 to 2022, and further earnings recovery in 2022, as occupancy levels in retail REITs recover to 92% from 95% in 2019.
“Consequently, the sector’s yield spread to the 10-year Malaysian Government Securities (MGS) has risen to three percentage points compared with the mean of 2.5 percentage points.
“Given the exceptionally low (hence inadequate) yields of fixed income instruments, it is quite likely that REITs’ yield spread would compress to a below-average spread, as relatively risk-averse yield seekers migrate to REITs.”
The MGS comprises marketable debt instruments that are issued by the Malaysian government to raise funds from the domestic capital market.