Revised guidelines on listed REITs seen positive for growth

Real estate investment trust sector

Maintain neutral: The Securities Commission Malaysia (SC) has implemented the new revised guidelines on listed real estate investment trusts (REITs) effective on April 9, 2018. The leading modification would be the eligibility to acquire vacant land for property development. This would stimulate greater opportunities and contribute to positive growth. We believe the revival in domestic spending would be sustained in 2018, leading to a stronger retail sales volume, hence favourable to retail REITs. We foresee a stable Malaysian Government Securities (MGS) yield on the back of no expectation of further overnight police rate (OPR) hikes in 2018. The current share price weakness poses an opportunity to collect Malaysian REITs (M-REITs) with healthy profiles. We maintain our “neutral” rating on REITs.

The revised guidelines on listed REITs focus on four major subjects: REITs’ investments, valuations and operational matters, and Islamic REITs. We feel the guidelines enhance clarity and improve flexibility to drive the sector. Major amendments would be to grant REITs the rights to acquire vacant land for the purpose of property development. Another apparent highlight would be the rulings on Islamic REITs, specifically on the weightage of syariah non-compliant tenants.

There are signs of revival in domestic consumption as we see a raise in domestic spending, through the growth in the retail sales index by 9.5% year-on-year [y-o-y] in 2017 with continued positive momentum in January 2018 (8.5% y-o-y). Secondly, the Consumer Sentiment Index has showed improvement since 2015 (63.8; 2016: 69.8) and ended at 82.6 in 2017. Thirdly, private consumption has also shown an increasing trend, with gradual improvement since 2015 (6%; 2016: 6.1%) and ended 2017 with 7%. We expect this trend to be sustained throughout 2018 (Bank Negara Malaysia’s forecast: 7.2%). Fourthly, the recent strengthening of the ringgit (year to date: 4.3% versus the US dollar) may lift consumer sentiment into 2018 and spur stronger consumer spending, leading to a stronger retail sales volume. Hence, we believe domestic consumption should augur well for retail-driven REITs, such as IGB REIT, Pavilion REIT and Sunway REIT.

We maintain our assumption of the 10-year MGS yield of 4.1% and valuations based on the two-year historical average yield spread. We reduce our earnings forecasts for CapitaLand Malaysia Mall Trust (CMMT) and Sunway REIT. We cut CMMT’s financial year 2018 (FY18) to FY20 earnings forecasts by 11% to 15% to reflect the weakness in its malls in the Klang Valley. Apart from that, we reduce Sunway REIT’s FY18 to FY20 earnings forecasts by 4% to 6% to reflect a lower assumption of overall rental reversion but mildly offset by the contribution from Sunway Clio.

While we maintain our “neutral” rating given the sluggish outlook for M-REITs, we feel that the recent share price correction provides an opportunity to accumulate selective REITs. We believe major REITs are still stable with sustainable yields.

Our top picks are MRCB-Quill REIT (“buy”; target price [TP]: RM1.44) given its sustainable attractive dividend yield of 8.5% (highest in our coverage) and IGB REIT (“buy”; TP: RM1.75) due to its prime location assets with high footfall. — Hong Leong Investment Bank Research, April 17

This article first appeared in The Edge Financial Daily, on April 18, 2018.

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