REITs to come under pressure this year

KUALA LUMPUR: Often regarded as a safe haven, the Malaysian real estate investment trust (REIT) sector is unlikely to be spared from the impact of slowing global and local economic growth this year, despite having seen relatively good harvests last year.
As Malaysia grapples with the new reality of low oil prices — it was trading at around US$28 (RM119.28) per barrel last Friday after dipping to near US$26 mid-last week — REITs that will face the brunt of the slowdown are expected to be those in the office space, which has already been strained by a persistent supply glut in recent years.
And consumer sentiment, at risk of sounding like a broken old record, continues to be weak. So, things are not looking that much better for those in the retail and hospitality spaces either.
Danny Chang, Standard Chartered Malaysia head of managed investment and product management, said the oil and gas (O&G) and related sectors had been slashing capital spending and headcounts significantly since the slump in oil prices. This, in turn, will lead to lower office space requirements.
“While some spaces may be protected by medium-term rental leases, local REITs with greater office space exposure, notably with O&G tenancy, will eventually face greater volatilility than REITs within the retail or hospitality sector,” Chang told The Edge Financial Daily in an email.
Chang, however, was quick to point out that the overall yearly dividend of local REITs will likely remain above 5.5%. That, coupled with the consensus expectation that the central bank will hold the overnight policy rate steady until the first quarter of 2017, may suggest that local REITs will likely remain an attractive option, said Chang. This will be especially true if the equities market remains volatile and capital gains become increasingly difficult to come by.
“Nonetheless, REIT investors need to be mindful of the underlying real estate sector exposure of the REITs, as not every REIT generates equal returns,” he said. However, he declined to pinpoint which REIT will likely outperform the market.
Pheim Asset Management Sdn Bhd porfolio investment director James Lau is also of the opinion that the current economic condition is “not a particularly bullish background for rental income when you also have signs of overbuilding (in the retail and office spaces)”.
In an email reply to The Edge Financial Daily, Lau said investors should also pay attention to rental income, which can be eroded by rising operating and maintenance costs. These expenses, unlike rental revisions, cannot be easily deferred without impairing the quality, appeal and ultimately the capital value of assets, he added.
To Lau, Pavilion REIT ( Valuation: 0.15, Fundamental: 2.40), Atrium REIT ( Valuation: 3.00, Fundamental: 2.45), AmanahRaya REIT ( Valuation: 2.70, Fundamental: 1.30) and AmFirst REIT ( Valuation: 1.70, Fundamental: 0.60) are likely to be the high yielders this year, as they have well-diversified asset portfolios in hospitality, logistics, office and retail spaces. According to Bloomberg, AmanahRaya REIT’s 12-month yield stood at 7.32%; Pavilion REIT’s was at 5.2%; Atrium REIT’s was at 8.03%; and AmFirst REIT’s was at 6.3%.
“REITs derive the bulk of their income from rentals. So, it is important that investors, in choosing a particular REIT to invest in, to consider the REIT’s asset portfolio, such as their location, quality and tenant mix,” Lau said.
When contacted, Kenanga Research’s REIT analyst, who declined to be named, said she views local REITs as not as attractive now for two reasons: The bond market is expected to be volatile, and local REITs are facing a down cycle of rental reversion.
“REITs are more responsive to the bond market than [to] the equities market, as they are [viewed as] an alternative to bonds. So, if the bond market is very volatile, so [will] the REITs’ unit prices,” she said over the phone.
Hence, even if REITs are generally a defensive sector, they won’t be able to really perform now, she added.
Further, she said if the ringgit falls further, bond yields will spike, while bond prices will drop. Thus, even if local REITs have — earnings-wise — priced in most of the weaknesses, now is still not a good time to be exposed to the sector, she said.
Like Lau, she also thinks most local REITs are in a down-cycle in terms of rental reversion now, in view of the current economic situation, particularly for office and retail REITs, due to the glut in their respective sectors. Those exposed to industrial spaces are also unlikely to see growth as commerce slows.
“In general, REITs’ performances this year will be quite rangebound. I don’t think there will be any exceptions,” she added.