REIT - Less excitement ahead

Recommendation: Neutral

We expect REITs' 2014 share-price performances to be subdued, weighed down by rising interest rates, a lack of asset injections and a potentially stronger performance of the broader market. Due to various macro and fundamental headwinds facing REITs in 2014, we remain Neutral on this asset class. Although on average, REITs offer higher yields than the average yields for the FBM KLCI of 3.4-3.7%, we believe their share-price upside will be capped by likely rising interest rates later in the year. We prefer property developers.

Due to various macro and fundamental headwinds facing REITs in 2014, we remain Neutral on this asset class. Although on average, REITs offer higher yields than the average yields for the FBM KLCI of 3.4-3.7%, we believe their share-price upside will be capped by likely rising interest rates later in the year. We prefer property developers. 

First up, then down in 2013 

Malaysian REITs did relatively well in early 2013, before the general election in May. They advanced more than the FBM KLCI in early 2013, from the weakest gainer, IGB REIT, which outperformed the index by slightly more than 1%, to Axis REIT, which significantly outperformed the index by more than 18%. After the election, REITs underperformed the broader FBM KLCI as the index provided returns of 10.2% while REITs declined by 10.5-22.7%. We took this as an indication that the market was no longer hungry for yields and was looking for more growth and value that other sectors such as oil & gas, construction and property could offer. 

Narrowing yield spreads 

We believe that their weak performance could also be attributed to a steady rise in yields for 10-year Malaysian Government Securities (MGS), which reached a high of 4.13% in Aug. This narrowed their spread over REIT yields, to a low of 50-100bp, below the average 200-230bp in the last 2 years. 

Lack of asset injections 

A lack of asset injections also weighed on REITs' performance, as there were no catalysts to spur interest in them. Although there were negotiations for asset acquisitions such as Axis REIT's various targets, no actual transactions occurred in 2013, which was disappointing.