All eyes on the west. The US Fed‟s QE tapering has
begun earlier than expected. The market will continue to interpret the
implications of US economic data to gauge the momentum and quantum of QE
tapering over the coming months. While interest-sensitive M-REITs are
likely to be laggards in 1H14 against a volatile yield environment, we
believe a large portion of the taper-related selloff is already factored
into unit prices, hence, we maintain our NEUTRAL stance on the sector.
Glory days have passed. 1H13 was the best year on record for M-REITs
with the listing of Malaysia‟s first ever stapled REIT, KLCCP (largest
by market value and asset size) in May, further supported by
yield-seeking/risk-averse investors accumulating the M-REITs pre-13GE in
May 2013 as they turned defensive and shunned political ambiguity.
However, the M-REIT sector has been severely sold down since the Fed
hinted at QE tapering on 22 May 2013.
Rising rates curtail deals, make yield stocks less appealing. Rising rates and stubbornly high property values would dampen acquisition activities, making fundraising difficult, with acquisitions having been a meaningful driver of earnings growth in a low interest rate environment over the past few years. We also see weaker demand for yield stocks. Berjaya Sports Toto Bhd has cancelled the listing of its gaming business trust on the Singapore Stock Exchange.
Cost pass-through depends on bargaining power. Electricity tariff and assessment rate hikes in 2014 are negative for M-REITs. While many commercial leases include rent escalation clauses and cost pass-throughs to tenants, the execution still depends on market conditions, with tenant retention a top priority. In our view, the presently oversupplied office market makes it difficult to pass on the extra costs.
The time is not ripe to be bold, as the repricing of the REITs could continue, especially in 1H14. We may see M-REIT yields moving towards the historical average spread over 10-year MGS yields of 314bps (+70bps), which implies 9-11% downside risk for unit prices. The re-entry point will be when the bond market/yields start showing signs of stabilisation, probably in 2H14 as uncertainty over the US Fed‟s monetary policy subsides.
Our preference is for REITs with solid fundamentals, visible asset pipelines from their sponsors and good valuation buffers to cushion the impact of a sudden surge in bond yields. We cut our TPs by 3-19% on higher beta and cap rate assumptions. BUY CMMT and PavREIT
Source: Maybank Research - 8 Jan 2014
Rising rates curtail deals, make yield stocks less appealing. Rising rates and stubbornly high property values would dampen acquisition activities, making fundraising difficult, with acquisitions having been a meaningful driver of earnings growth in a low interest rate environment over the past few years. We also see weaker demand for yield stocks. Berjaya Sports Toto Bhd has cancelled the listing of its gaming business trust on the Singapore Stock Exchange.
Cost pass-through depends on bargaining power. Electricity tariff and assessment rate hikes in 2014 are negative for M-REITs. While many commercial leases include rent escalation clauses and cost pass-throughs to tenants, the execution still depends on market conditions, with tenant retention a top priority. In our view, the presently oversupplied office market makes it difficult to pass on the extra costs.
The time is not ripe to be bold, as the repricing of the REITs could continue, especially in 1H14. We may see M-REIT yields moving towards the historical average spread over 10-year MGS yields of 314bps (+70bps), which implies 9-11% downside risk for unit prices. The re-entry point will be when the bond market/yields start showing signs of stabilisation, probably in 2H14 as uncertainty over the US Fed‟s monetary policy subsides.
Our preference is for REITs with solid fundamentals, visible asset pipelines from their sponsors and good valuation buffers to cushion the impact of a sudden surge in bond yields. We cut our TPs by 3-19% on higher beta and cap rate assumptions. BUY CMMT and PavREIT
Source: Maybank Research - 8 Jan 2014
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