Don’t write off M-REITs yet

WHEN the US Federal Reserve slashed rates last month, relief must have washed over real estate investment trusts like Singapore REITs (S-REITs) and Hong Kong REITs (HK-REITs).

Both had been battered by elevated interest rates in the last couple of years.

Higher interest rates would mean investors didn’t need to buy REITs for decent yields. REIT managers also had to contend with higher borrowing costs to grow their assets.

But now, lower interest rates make REITs’ yields relatively higher compared to other interest rate-linked products.

There is the flight-to-safety theory. The rate cut does create some volatility in the market, causing some investors to seek a defensive strategy - in REITs, which have long been deemed a stable asset class.

Data from Bloomberg shows that the S&P Singapore REITS Index climbed by 12% over the last 4 months, while it was more than a 20% rise for the Hang Seng REIT Index.

In the same period, US 10-year Treasury yields – which are closely related to the country’s interest rates – fell by 14%.

In contrast, M-REITs have been less reactive to changes in the US interest rates, mainly due to Malaysia’s stable interest rates, which have not been adjusted since last May.

REITs in Singapore and Hong Kong are experiencing a sharp rebound, as they are coming from a lower base.

Here is an interesting premise, though: once investors indulge in S-REITs and HK-REITs, those REITs will see their yields decrease as their unit prices rise. This, in turn, could draw foreign investors’ attention to M-REITs.

Tradeview Capital Sdn Bhd portfolio manager Ng Tzyy Loon says that while this is a possibility, there are challenges, as M-REITs generally have lower liquidity and are smaller than their Singapore and Hong Kong counterparts.

“The total market capitalisation of M-REITs is around RM30bil, while that of S-REITs is close to 10 times larger, at about RM300bil. Hence, there will not be a lot of interest from foreign investors in M-REITs, as there are larger REIT markets elsewhere,” he tells StarBiz 7.

HK-REITs have a total market capitalisation of around RM81bil.

This week Maybank Investment Bank Research upgraded M-REITs on the back of better earnings growth, supported by sustained occupancy and rental rates, coupled with new asset injections. The bank also noted that the spread between M-REITs’ forward dividend yield and 10-year Malaysia Government Securities (MGS) yield is on an upward trend due to better earnings prospects of M-REITs.

The current yield gap between the 10-year MGS and the KL REIT Index stands at 221 basis points. The 10-year MGS yield is now at 3.77%, while the KL REIT Index yield stands at 5.98%.

Meanwhile, CIMB Securities notes that rate cuts are not expected to take place in 2024 and 2025.

“Interest in M-REITs may increase if the yield spread becomes more attractive. Additionally, active capital recycling strategies could attract greater foreign interest,” the research house tells StarBiz 7.

Yet another challenge for M-REITs is that they are not “sexy” enough.

“While we have a lot of good-quality local REITs, many of them have been holding the same assets for a very long time. REITs become attractive when their managers are able to find assets on the cheap and turn them into high-yielding assets with the capital they raise,” Ng of Tradeview says.

The absence of data centre (DC) REITs also adds to the lack of excitement in M-REITs. Across the Causeway, a number of DC REITs are listed, with big names like Keppel DC REIT, Digital Core REIT, and Mapletree Industrial Trust.

Malaysia has more than 30 operational data centres and about 1.2 gigawatts of capacity in the pipeline for future developments.

“A lot of announcements have been made, but we have yet to see the real execution of those projects,” says Ng.Positives for M-REITs

There are some positive signs for M-REITs, though. One is that there seems to be resilient domestic spending, which would work to the benefit of retail-focused REITs.

Mall occupancy rates, which had been on a downward trajectory from 2013 to 2021, are seeing a reversal. This turnaround began in 2023, with a gradual improvement in occupancy rates, reaching an average of 80.4% in the first quarter of 2024 (1Q24).

Then, there is a gradual rise in tourist arrivals. The country recorded 5.8 million tourists in 1Q24, marking a 32.5% increase compared to 4.3 million in the same period last year.

Perhaps the most interesting development is the imminent launch of new REITs in the market.Two big groups are planning to list their REITs, namely, WCT Holdings Bhd and S P Setia Bhd.

WCT is set to establish a new REIT called Paradigm-REIT, which will include three retail properties valued at RM2.4bil. The listing is expected to occur on the Main Market of Bursa Malaysia by 1Q25, with WCT retaining a 60.7% stake in the new entity.

Property developer S P Setia has plans to inject its investment properties into a REIT within the next 12 months, with a valuation of RM1.3bil to RM1.5bil.

It has been speculated that IOI Properties Group Bhd may also establish a REIT, given its increasingly mature investment properties portfolio.

These new listings are expected to spur investors’ interest, says RHB Research property sector head Loong Kok Wen.

“Additionally, lower interest rates are attracting property funds to invest in more real estate assets. This is expected to drive overall asset values higher. Overall, a more active real estate market can be expected in 2025,” she states.

RHB’s Loong is also bullish on industrial REITs, given the more favourable demand-supply dynamics in that segment.

“Industrial REITs have been the hotspot among investors in the last three to four years, driven by strong demand due to the US-China trade war and post-Covid-19 pandemic recovery.

“The influx of data centres is also pushing up industrial asset prices,” she says.

As Malaysia becomes a hotbed for new data centres, the local bourse could see the entry of new DC REITs.

Loong says this has not happened yet because it is still a relatively new asset class and REITs are taking a cautious approach.

“It may take a couple of years but it is not impossible. Acquiring a data centre asset also requires major fundraising, as it could cost more than RM1bil,” she adds.