M-REITs in the limelight

KUALA LUMPUR (Aug 6): The recent high demand for Malaysian real estate investment trusts (M-REITs) have pushed their dividend yields lower, making them more expensive than their Singapore peers.

M-REITs, which have generally outperformed the broader market here year-to-date, have seen their average dividend yield decline to about 6.8% compared with 7.4% as at end-2011, according to analyst reports.

Yields for local retail-centric REITs, which are increasingly popular due to their better growth prospects compared to, say, office REITs, have gone down to 5% from 5.8% during the same period. This compares with Singapore retail REITs where yields are higher at between 5.1% and 6.3%.

Although more expensive in general, industry players said M-REITs are still on investor radar. According to Stewart LaBrooy, CEO of Axis REIT Managers Bhd, the manager of Axis REIT, the continued high demand for M-REITs has been driven by a low interest rate environment as well as a stable rental market.

LaBrooy said this comes against a still volatile global economic landscape, prompting investors to acquire safer investments such as REITs. “Basically, people are piling into safer investments.

Foreign investors have indicated interest in MREITs as well,” LaBrooy told The Edge Financial Daily over the telephone last Tuesday.

CIMB Investment Bank Bhd analyst Foong Wai Mun who has an “overweight” call on the M-REIT sector said dividend yield compression is likely to persist as investors buy local REITs and push their prices higher.

However, he said the favourite in the M-REIT sector is currently retail-centric REITs.

The players in this segment include Pavilion REIT, Hektar REIT, CapitaMalls Malaysia Trust, Sunway REIT, and the highly anticipated IGB REIT that will soon be listed.

Foong said retail REITs have been in high demand as investors expect they will be able to revise upwards the rentals for their shopping malls in the coming months, and that their asset enhancements will be earnings accretive.

“Investors also like their ability to deliver good earnings and their proven acquisition track records,” Foong wrote in a recent note.

In general, fund managers believe the ample local market liquidity has increased investor appetite for big-cap, quality and liquid M-REITs that exhibit resilient earnings and growth profiles, as evidenced by the premium over their net asset value and yield compression seen recently.

On the region as a whole, AmInvestment chief investment officer Andrew Wong pointed out that Asian REITs have outperformed their global peers.

Although investors were seen shifting their funds to safe haven US-dollar denominated assets, Wong said Asian REITs are still doing well due to their defensive qualities.

“There is demand for retail and commercial properties in Asia,” Wong said, adding that a low interest rate environment against global economic volatility could lead to a larger spread between regional benchmark interest rates and REIT dividend yields, prompting investors to capitalise on these defensive stocks.

This article appeared in The Edge Financial Daily on Aug 6, 2012.