PETALING JAYA: Real estate investment trusts (REITs) are still deemed to be attractive despite rising bond yields, according to UOB Kay Hian.
In a report yesterday, UOB Kay Hian noted that while the share prices of REITs are negatively correlated to bond yields, it had not observed this trend since 2020.
“In fact, the correlation turned slightly positive in 2020 (-0.5 for 2013 to 2020 compared with +0.05 for 2020 to 2021).
“The spread between the Malaysian Government Securities (MGS) and the average REIT has narrowed to 2.1 percentage points compared with an average of 2.6 percentage points due to rising bond yields, ” it said.
The MGS comprises marketable debt instruments that are issued by the Malaysian government to raise funds from the domestic capital market.
UOB Kay Hian added that it does not see share prices of REITs to be negatively affected in the short term, given that prices have run up 4% on average since end-February.
“Moreover, yields are still attractive, between 5% and 8%, further buoyed by an expected earnings recovery through 2022.”
UOB Kay Hian said Malaysian REITs still commanded 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 and 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.”
The research house has “buy” calls on IGB REIT, Pavilion REIT, Sentral REIT and Sunway REIT. “We prefer Sentral REIT and Pavilion REIT as our top picks as Sentral REIT offers high and resilient yields of 8% and Pavilion REIT is the sole laggard having declined 2% year-to-date.”
According to UOB Kay Hian, channel checks revealed that footfall at malls are recovering, in tandem with the easing of standard operating procedures.
“In addition, travel bubbles between states in the recovery movement control order phase are allowed for domestic tourism (REITS under coverage are still under the conditional movement control order phase).
“About 0.9% of the Malaysian population has received the first dose of the vaccine. We will be able to see the light at the end of the tunnel as the vaccination programme continues and the pandemic is brought under control.”
UOB Kay Hian said the retail segment will likely rejuvenate as the economy revives, spurred by domestic consumption.
“In addition, hotels will also see some recovery but will only see a significant impact when international borders reopen.
“Although we foresee soft first-quarter 2021 results, we expect the sector to deliver 29% and 5% earnings growth in 2021 and 2022, with 2022 earnings at 97% of 2019 earnings.”