Islamic REITs to trail stocks on faster economic growth

KUALA LUMPUR: Malaysia’s Islamic real estate investment trusts (REITs) may underperform stocks this year as quickening economic growth boosts companies’ earnings.

Al-’Aqar Healthcare REIT, which owns mostly hospitals, is forecast by analysts to pay a dividend yield of 6.12% this year, in line with the return predicted for Axis REIT, which holds commercial and industrial properties, data compiled by Bloomberg show.

Earnings for the 30 corporates on the FBM KLCI are seen climbing by an average 7.4%.

Malaysia’s economy will expand 5.2% in 2014, faster than the 4.7% pace in 2013, April forecasts from the Washington-based International Monetary Fund show. In an environment where Malaysian interest rates will probably rise this year, REITs and bonds are less favourable than equities, according to Pheim Asset Management Sdn Bhd.

“Stocks will outperform REITs and bonds as corporate earnings will improve along with the pace of economic growth,” James Lau, who helps manage US$300 million (RM978 million) as director of investment at Pheim Asset Management, said in a telephone interview yesterday.

“When interest rates start to go up, then the yield advantage won’t be sufficient for investors to stay with the REIT.”

Al-’Aqar, the oldest Islamic REIT in Malaysia, climbed 4.5% this year to RM1.39 and reached an unprecedented high of RM1.48 in September 2012. Axis REIT, which touched a record RM4.18 in June 2013, has increased 15.7% to RM3.39.

Syariah-compliant REITs forbid investment in properties associated with activities deemed unethical under Islamic law such as gambling, financial services that pay interest, hotels and bars.

While Malaysia’s Islamic REITs are gaining this year, Singapore’s Sabana Syari’ah Compliant Industrial REIT, the largest of its kind in the world, lost 3.7% to S$1.04 (RM2.70) after reaching a record S$1.385 in April 2013. Sabana is forecast to pay a dividend yield of 7.79% in 2014, data compiled by Bloomberg show.

Average earnings for the 30 companies on the FTSE Straits Times Index of shares may decline 1.4% in 2014. The gauge of stocks has advanced 3.3% so far this year. The IMF forecasts that growth in the city-state will slow to 3.6% from 4.1%.

REITs are considered a de-facto bond substitute, where you get a steady stream of income with not much capital upside, Pheim’s Lau said. In a rising interest rate environment, the spread between bond yields and the REIT dividend yield will narrow, making them less attractive.

The yield on Malaysia’s benchmark three-year non-Islamic government notes climbed five basis points this year to 3.4% and reached a seven-month high of 3.43% on April 4, data compiled by Bloomberg show. Average borrowing costs on the nation’s top-rated AAA corporate bonds due in 2017 have increased 16 basis points in 2014 to 3.87% and touched 3.9% on April 7, the highest level since July 2009.

“The share prices of Malaysia’s Islamic REITs have corrected and the yields look attractive compared with bonds,” Lam Chee Mun, a fund manager at TA Investment Management Bhd, which oversees RM680 million, said in an interview on Monday. “While most fund managers won’t go overweight on REITs given expectations of rising interest rates, they may hold some REITs for their recurring income portfolio.”

Twelve of 17 economists surveyed by Bloomberg see the central bank raising its benchmark interest rate by at least 25 basis points to 3.25% this year. Swap rates are indicating a 50 basis point move amid the fastest inflation since 2011.

Sabana issued Singapore’s first convertible sukuk in September 2012, which can be exchanged for stocks at a target price of S$1.14. It sold S$80 million of five-year Islamic notes to yield 4.5% and those securities were paying 3.6% when last traded on April 18, according to data compiled by Bloomberg. The investment trust also offered S$85 million of syariah-compliant debt with a maturity of four years to yield 4% in March via private placement.

Global issuance of bonds that pay returns on assets to comply with Islam’s ban on interest rose 13% to US$15.9 billion in 2014 from a year earlier, after reaching US$43.1 billion in 2013, the second-highest on record, according to data compiled by Bloomberg. In Malaysia, the world’s biggest sukuk market, offerings more than doubled to RM24.5 billion.

The Bloomberg-AIBIM Bursa Malaysia Corporate Sukuk Index, a benchmark that tracks the most-traded local currency notes, retreated 0.4% in 2014 to 104.69, after gaining 2.8% last year.

While REITs do offer dividends, they will not perform as well as equities when the economy is expanding, according to RHB Asset Management Sdn Bhd.

“REITs are a defensive instrument and in an environment of rising interest rates, they are less appealing to investors,” Hoe Cheah How, chief investment officer overseeing RM38 billion at RHB Asset Management, said in an April 18 telephone interview. “People would prefer to have exposure to stocks that offer earnings potential.” — Bloomberg

This article first appeared in The Edge Financial Daily, on April 23, 2014.


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