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REITs not likely to be affected by another OPR hike, say analysts

KUALA LUMPUR: The yields from real estate investment trusts (REITs) will remain at current levels, even if the overnight policy rate (OPR) is increased again by year-end.

Analysts do not expect a significant shift of interest from REITs to other fixed-income investments such as government bonds as bond yields are unlikely to move in tandem with an OPR hike, given the sustained foreign interest in them.

“Generally, people perceive that when the OPR goes up, the bond yield would go up as well. But surprisingly, when Bank Negara Malaysia (BNM) increased the OPR to 3.25% in July this year, the bond yield of MGS (Malaysia Government Securities) actually went down to 3.88%,” Kenanga Research REIT analyst Sarah Lim told The Edge Financial Daily. 

That was possibly because of the positive carry trade, in which foreigners would be holding in the bond market, coupled with a liquidity-driven market, she said.

Lim compared the situation with what happened in 2009, when BNM trimmed the OPR by 75 basis points to 2.5% to boost economic growth.

“The MGS bond yield went up after that and in 2010 when BNM increased the OPR again, the MGS bond yield dropped.

“[So] the OPR doesn’t really affect the bond yield of 10-year MGS that much. I believe the MGS will compress further and may level [off] at 3.8% going forward due to another potential European quantitative easing, while the market is still liquidity-driven,” she said.

The borrowings of most REITs covered by the research house also lean towards fixed-rate loans, she said. So if BNM were to raise the OPR by another 25 basis points, earnings for these REITs would not be significantly affected.

“At this juncture, when the market is lacking ideas, I believe the investor could bank on REITs’ premises for defensiveness and some yields,” Lim said.

Echoing Lim’s sentiments, Maybank research analyst Wong Wei Sum said rising interest cost risk should be manageable as most REITs have effectively managed their debt profiles.

“Quill Capita Trust, Pavilion REIT and IGB REIT would be the least affected as close to 100% of their debts are at fixed rates,” she said.

She advised that investors, apart from looking at valuations, should also study the property segments and the asset quality the REIT carries as that will determine earnings prospects.

Earlier this year, there was a sudden surge in the yield of the 10-year MGS bond as the quantitative easing in Europe tapered off, causing a selldown of all local REITs.

But it has since stabilised and started trending down since February, despite the recent OPR hike, noted Wei Sum. Like Lim, she suspects it could be due to strong foreign as well as domestic demand.

While she does not expect large fluctuations in bond yields, the M-REIT sector lacks strong rerating catalysts. Hence, she maintains a “neutral” call on the sector.

Areca Capital fund manager Danny Wong said as the yield of REITs is averaging 6%, it is fair to acquire the stocks now.

“[But] I would not consider office REITs as there could be an oversupply in the market already, given that developments like the Tun Razak Exchange and Wawasan Merdeka will bring more offices into the market.”

He favours mall REITs as consumer spending is still strong, hence yields from mall REITs will continue to be strong. 

REIT

 

This article first appeared in The Edge Financial Daily, on August 7, 2014.

 

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