WHILE the battle with Covid-19 ensues, the defensive Malaysian real estate investment trust (REIT) sector is still seen by many as an ideal alternative for many investors.
Alpha REIT Managers chairman Datuk Stewart LaBrooy says REITs represent “the cream of properties” in Malaysia and are run by the best asset managers in the country.
“It is an asset class worth considering at this present time, where there is a weakness in their pricing because when the market returns, they will lead the way to recovery,” he tells StarBizWeek.
“The Malaysian REIT sector performance points to the fact that they are still the ultimate defensible stock pick. Their pricing in the market points to the confidence expressed by investors who hold on knowing a recovery is on the way and appreciate that they are still paying out dividends.”
REITs enjoy a tax-free status on the condition that at least 90% of their total income is distributed to investors or unit holders annually.
On the back of a nation-wide vaccination programme that has been picking up pace, LaBrooy states that local REITs performance will be able to reach pre-pandemic levels by the fourth quarter of this year.
“The promising progress in our nationwide vaccination programme all point to the economy staging a strong recovery in the fourth quarter if all goes to plan, as we head towards a herd immunity and with the economy opening up.
LaBrooy says the industrial sector will continue to outperform, on the back of increasing demand in the e-commerce space, coupled with the launching of new industrial projects in the Klang Valley.
“It was not that long ago that warehouses were unloved by investors, who continued to pour money into retail and office space.
“But things look vastly different now. Our cities and townships are grappling with too much retail space and it looks like the logistics sector cannot build warehouses quickly enough.”
As online retail grows, LaBrooy says the type of people required in warehousing has changed as well, comprising robotics engineers and data scientists.
“Warehouses have become huge centres of technical excellence to gain efficiencies.
“It is my view that there is a long way to go before Malaysia hits its saturation point.”
Commenting on the impact of the lockdown, LaBrooy says some REITs have been affected more than others.
“Apart from the industrial and education sectors, the lockdown, if continued indefinitely, will have a devastating effect on the retail, office and hospitality REITs.
“We will see an alarming rise in bankruptcies and unemployment, which will take its toll on consumer confidence and consumption.”
For the retail sector, LaBrooy says the real problem will arise when the tenants are driven out of business, adding that it will take time for malls to reach the occupancy levels they enjoyed during the pre-pandemic era as they seek new replacements. “An alternative strategy needs to be developed to open up our economy soon,” he says.
AmInvestment Bank in a recent report says retail REITs will largely be on a recovery path moving into the second half of 2021, as the economy reopens in stages.
“According to the government’s National Recovery Plan, the country’s economy is expected to fully reopen by November and December, which we believe is an opportune time to capture the year-end holiday season when people are most likely to spend.
“This is in line with our assumptions that domestic footfalls will fully recover by year-end or even exceed historical peaks, as people are more likely to travel domestically while waiting for more clarity on new regulations for international cross-border travel.”
Apart from that, AmInvestment Bank says retail sales recovery in the second half of 2021 will also be fuelled by pent-up consumer demand after the lockdowns.
This, the research house says, is similar to what happened last year after the first lockdown was lifted.
“Based on the previous occasions when lockdowns were lifted, the malls under our coverage observed higher average sales per footfall.
“We believe earnings visibility and associated risks of REITs now are much better as compared to last year, thanks to the widening rollout of vaccines both locally and globally.”
DBS Group Research, meanwhile, says the impact to the office segment from the lockdown should be manageable, as office leases are bound by long-term contracts and losses in rental are not as severe as the retail segment.
“As seen in the previous lockdowns, the office segment saw a minimal decline in its rental revenue.
“While we believe that the office culture may shift, the office is likely to remain the primary location for businesses to operate.”
Citing statistics from the National Property Information Centre, DBS Group Research says occupancy remains above the 75% level in the Klang Valley, adding however that it had inched down from the recent peak of 79% with additional space added in the industry.
Furthermore, citing market research firm Ipsos, DBS Group Research says Malaysians who worked from home had the highest level of anxiety among the 28 countries polled.
“This could mean that office space and working environment remains an essential element in the working class.
“Although working from home offers flexibility, it also comes with difficulties in achieving a work-life balance as well as juggling family needs and ensuring proper equipment to get the work done.
“In the research, 63% found it difficult to achieve work-life balance and 62% felt their home is unequipped to get the work done.
“Many had to invest money into the Internet and computers during the pandemic to ensure workflow.”
Meanwhile, LaBrooy believes that the local REIT sector will be able to see a strong rebound by late 2021 and a boom by the first quarter of 2022, if vaccinations can be accelerated to the point that the economy can reopen fully by December this year.
“The patterns are there to see globally.
“Those countries that raced to get their population immunised are seeing strong growth already as consumers return to the market in droves.
“Employment will recover strongly as demand rises and we could see the end of this pandemic once and for all by next year.”