Long Term: Neutral
Although
there is an abundance of retail space in the Klang Valley, it has not
affected the rental reversions of malls held by the REITs we cover.
However, the continued arrival of new malls does suggest a worrying
outlook post 2015. We retain our Neutral call on the M-REIT sector as
the dividend yields of 5.1-5.5% for FY13-14 are not particularly
attractive relative to the 3.98% yield for 10-year MGS. Furthermore,
given our bullish view on the overall market, we believe that investors
will shy away from defensive stocks such as REITs, preferring sectors
that offer higher returns such as oil & gas and construction. Our
preferred REIT is KLCCP due to the prime location of its assets
(Petronas Twin Towers and Suria KLCC) while its property development
projects would provide the REIT with key assets in the longer term.
We
retain our Neutral call on the M-REIT sector as the dividend yields of
5.1-5.5% for FY13-14 are not particularly attractive relative to the
3.98% yield for 10-year MGS. Furthermore, given our bullish view on the
overall market, we believe that investors will shy away from defensive
stocks such as REITs, preferring sectors that offer higher returns such
as oil & gas and construction. Our preferred REIT is KLCCP due to
the prime location of its assets (Petronas Twin Towers and Suria KLCC)
while its property development projects would provide the REIT with key
assets in the longer term.
What Happened
The
Starbiz weekly published an article focusing on the oversupply of
retail malls in the Klang Valley which have caused rental rates to be
flat in recent times. This surprised us as most of the retail REITs
under our coverage recently achieved positive rental reversions of
10-15%. The article did go on to highlight that the main story is not
just oversupply but the disparity between the successful malls and the
struggling ones. The successful malls are the likes of KLCC Property's
Suria KLCC and Pavilion REIT's Pavilion, which thrive due to their
status as the go-to destinations for fashion outlets. According to
property valuer Henry Butcher's MD the oversupply and overbuilding
situation is only apparent in the city and not in the smaller towns.
What We Think
We
think that the oversupply of malls is not a major concern yet. However,
by 2015, mall space will increase by 28%, which could affect the
occupancy rates of even the malls that are doing well.
What You Should Do
We
recommend that investors stop accumulating REITs as dividend yields are
not attractive relative to the risk-free rate. In the longer term, the
rental reversion outlook does not look bright given the mall glut which
will depress future rental reversions.
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