HLIB Research upgrades M-REITs to 'Overweight' after OPR cut

KUALA LUMPUR (July 14): Hong Leong Investment Bank Research (HLIB Research) has upgraded Malaysian Real Estate Investment Trusts (M-REITs) to “Overweight”, following Bank Negara’s move to cut the overnight policy rate (OPR) by 25 basis points to 3% yesterday.

In a note today, HLIB analyst Lee Meng Horng said the OPR cut will bode well for M-REITs, as monetary easing spurs equity inventors to move into yield assets which are often sought after by investors during monetary easing due to its stability and high yielding nature, despite its average yield being compressed to 6.2%.

“Moving forward, we expect the potential downside for Malaysian REITs from external factors limited with no immediate risk of narrowing yield spread, given the monetary easing bias and its relative attractiveness, amid the low yield environment and uncertainties in the global market,” the note read.

“Another near term potential catalyst for the sector is the possible revision of REIT guidelines by the Securities Commission (SC) to allow for green development up to certain percentage of total assets value, similar to Singapore and Hong Kong, who allows development up to 25% and 10% of the REITs’ total value, respectively,” he added.

He said the catalysts for the REIT sector are the potential to acquire quality assets to achieve growth on the back of a soft property market outlook, higher disposable income which may spur retail spending which will in turn boost retail REITs, regulatory intervention to limit the supply of offices or malls, and regulatory changes regarding green development.

He said local consumption would also be further boosted from the expected interest savings resulting from the OPR cut, improved sentiment, on top of normalisation of the goods and services tax (GST) impact, festive seasons and measures to support disposable income.

“Which is a relief to our earlier worry on softer rental reversion,” he added.

Lee said although lower interest rate leads to potential lower interest expense, the research firm does not expect significant interest savings for M-REITs on its borrowings as more than 90% of the REITs’ borrowings are in fixed rate, except for Axis REIT and Capitaland Malaysia Mall Trust (CMMT), whose exposure to the floating interest rate is circa 50% and 25% as of financial year 2015.

Lee revised his assumption of 10-year Malaysian government securities (MGS) yield to 3.5%, from 4% previously, based on one-year historical average yield spread, as well as the possibility of further monetary easing in the near future.

His top picks are MRCB-Quill REIT (“Buy”, target price or TP: RM1.34), given its high dividend yield of 7.3% and imminent assets injection and Pavilion REIT (“Buy”, TP:RM1.98) on its income growth projection in financial year 2017 (FY17) post acquisitions and major reversion with dividend per unit (DPU) yield of 5.3% at current price.

HLIB also upgraded KLCCP Stapled Group (KLCCSS) to “Buy” (TP: RM8.38) after revising its MGS assumption, the expected improvement in its hotel operations in FY17, stable assets and premier assets location with a projected DPU yield of 5%. —

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