M-REIT overall earnings to normalise going forward, says RHB Research

KUALA LUMPUR (Dec 19): RHB Research has maintained its “Neutral” rating on the Malaysian Real Estate Investment Trust (M-REIT) sector going into 2015, and said it believes that overall earnings will start to normalise after being hit by higher expenses in 2014.

In a note Friday, the research house said the lowered risk of an OPR hike should mitigate the REITs’ exposure to interest rate volatility.

RHB Research said retail REITs would continue to outperform their peers, given their relatively stable average annual rental rate growth of about 5-7% vis-à-vis 2-3% growth in the industrial segment and flattish annual growth for the office sector.

Nonetheless, it said retail REITs could still be susceptible to the expected slowdown in consumer discretionary spending.

“That said, the turnover rent portion only accounts for less than 5%, as most retail REITs rental incomes are fixed.

“As such, any short-term slowdown in sales should have minimal impact on the overall REITs’ earnings.

“We also believe that the possible cannibalisation effect from the incoming supply of new retail space will be minimal, as the malls under the REITs are typically more mature and have well established positions in the market given their sizes,” it said.

RHB Research said although its expectation of a zero-rate hike next year was favourable to the REITs, upside potential will be limited.

“This is because the sector continues to lack re-rating catalysts and excitement, with our expectation of only a low single-digit sector earnings growth.

“Sunway REIT is our pick for the sector,” it said.