THAT light at the end of the tunnel is getting brighter and brighter for the Malaysian real estate investment trusts (REITs).
Seen as one of the “recovery play” sectors, thanks to the reopening of the economy, REITs are generally expected to see improved earnings this year.
However, growth may be uneven across the board as some segments of REITs may continue to see soft demand from the market.
In terms of yield, amid a continued low interest rate environment despite expectations of rate hikes later this year, one can anticipate continued attractive returns from the Malaysian REITs (M-REITs).
A REIT is a company that owns and operates income-producing properties.
In 2022, retail and industrial REITs could be among the outperformers as shoppers return to malls and factory spaces see increased demand from the manufacturers.
Healthcare REITs are also expected to enjoy a better year in 2022, driven by the potential recovery in medical tourism and the improved demand for healthcare services.
On the other hand, the outlook may not be as favourable for hospitality, especially office-based REITs.
While the hospitality REIT segment could see pent-up demand from domestic leisure and business travels, it may take a while before hotels’ occupancy rates return to pre-pandemic levels.
Meanwhile, office-based REITs would likely continue to face headwinds arising from the oversupply conditions and adoption of work-from-home (WFH) policies.
The last two years have been rocky for the M-REITs, amid movement restrictions and the challenges in the property market.
Bursa Malaysia’s REIT index had slumped by 13.4% and 5% in 2020 and 2019, respectively, underperforming the benchmark FBM KLCI in both years.
Earnings of REITs were dismal in 2021, as mall operators provided rental assistance schemes to tenants amid lower footfall.
Nevertheless, with a more positive expectation for the overall economy this year, the outlook for REITs could likely improve as well.
In an earlier note, MIDF Research says that earnings of REITs are forecast to recover in 2022, as tenants are allowed to operate again and that enables operators to collect full rental from tenants.
Besides, the recovery in footfall at shopping malls should also support tenant sales.
MIDF Research believes that the tenant sales in 2022 might benefit from revenge shopping by consumers.
“Overall, we see an improving outlook for REITs in the first quarter of 2022. However, the recovery is likely to be gradual.
“We think that REITs will only resume on its stable growth trajectory once the retail industry recovers strongly and improves rental reversion outlook.
“In a nutshell, we are neutral on REITs with positive bias as we see an improving outlook for M-REITs,” it says.
Recently, a number of REITs have announced their results for the quarter ended Dec 31, 2021.
While the results were mixed, they were in line with expectations and there are indications that the situation for REITs is already on the mend.
Axis-REIT’s net profit more than doubled in the fourth quarter ended Dec 31, 2021, mainly due to contributions from newly acquired properties and positive rental reversion.
In a filing with Bursa Malaysia, Axis-REIT said its net profit increased to RM99.98mil from RM49.27mil in the previous corresponding quarter.
Axis-REIT invests in commercial, office and industrial real estate.
KIP REIT, which is involved in community centric malls, also saw a higher net profit, up by 4.5% year-on-year (y-o-y) to RM9.05mil in the fourth quarter of 2021.
Meanwhile, UOA REIT posted a net loss of RM5.21mil, as compared to a net profit of RM7.55mil in the fourth quarter of the previous year.
UOA REIT owns real estate assets in Kuala Lumpur that are predominantly used for commercial purposes.
Sentral REIT, which owns commercial assets, also saw its net profit in fourth-quarter 2021 dropping by almost 61% y-o-y to RM4.8mil.
Following the latest results, RHB Research maintains its “buy” call on Sentral REIT and Axis-REIT.
The brokerage says that the results of both REITs are in line with its expectations.
On Sentral REIT, RHB Research is cautious about the reversion rates remaining at flattish levels, considering that over 30% of the leases up for renewal were not renewed last year.
Amid the rising WFH trend, RHB Research believes the demand for office space will remain, with tenants only downsizing their presence.
“That said, we prefer strategically located prime office buildings such as Platinum Sentral and Menara Shell.
“We believe Sentral REIT should be able to maintain its robust 90% occupancy levels moving into financial year 2022 (FY22) despite the threat of WFH, considering the quality of its prime assets,” it says in a note.
On Axis-REIT, RHB Research continues to like the trust as a key player in the industrial segment, leveraging on the rise of e-commerce and demand for warehousing.
“With its acquisition target value of RM400mil, we look forward to a pick-up in its acquisition spree while its venture into property development is laudable.
“We believe the rental reversion rate this year will be just as encouraging – in light of the e-commerce boom, as non-renewal risk remains a non-issue for the REIT, especially for the industrial assets,” it says.
Meanwhile, MIDF Research says that Axis-REIT’s earnings for FY21 were above its expectations.
As a result, the research house has revised its revenue and earnings forecasts for FY22 upward by 6.6% and 56%, respectively.
“We remain positive on the earnings outlook for Axis-REIT, as its asset portfolio mainly consists of industrial assets whereby tenants are still operating amid Covid-19 pandemic.
“Earnings outlook is expected to remain stable as industrial assets are relatively shielded from the pandemic,” it adds.
Axis-REIT had an occupancy rate of 96% by end-2021.
Hong Leong Investment Bank (HLIB) Research is also bullish on Sentral REIT and Axis-REIT.
However, the brokerage has maintained its “hold” view on UOA REIT although the fourth-quarter 2021 results were in line with expectations.
It points out that on a quarter-on-quarter basis, UOA REIT witnessed a decline in occupancy in some older assets and a higher maintenance costs incurred.
The REIT’s occupancy rate stood at 82% by end-2021, notably lower than Axis-REIT and Sentral REIT.
“We expect 2022 to remain stable, given minimal retail exposure unlike other mall-based REITs.
“UOA REIT will continue to concentrate on prudent capital management.
“While potential acquisition is not expected to occur in the near future, the preferred location would be within the Klang Valley,” says HLIB Research.