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RHB Investment Research Reports

Author: rhbinvest   |   Latest post: Tue, 19 May 2020, 11:57 AM

 

REITS - Fundamentals; An Indication of Survival

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  • Maintain OVERWEIGHT. We believe central banks in the region are likely to keep interest rates low over the medium term to defy a significant slump in economic growth. While SREITs’ current yield spread is at 550bps, MREITs’ yield spread of c.260bps is near its record high of 290bps. As valuations have gone beyond or are around -1SD, we advise investors to start accumulating selective industrial REITs, and quality commercial REITs holding prime assets that can better withstand current market headwinds.
  • More solid balance sheets. REITs today are more disciplined with their borrowings vis-à-vis the global financial crisis (GFC) in 2008-2009. The average gearing for MREITs and SREITs now stand at 32.3% (threshold at 50%) and 35.5% (threshold at 50%) – hence, REITs should have sufficient buffer to withstand potential write-down in asset value.
  • Strategic opportunities for inorganic growth. REITs with strong balance sheets and cash flow are likely to be the winners in this crisis, as the current market downturn presents a good opportunity for REITs to acquire assets that may be offered at a discount.
  • Industrial segment, a bright spot. We believe industrial REITs will fare better. Generally, this segment is rather resilient given long-term tenancies and low-base rentals. While Singapore is more advanced in its industrial activities, as the nation is moving towards high-tech manufacturing, Malaysia will likely see a return of foreign direct investments once economic activities regain momentum.
  • Office sector is stronger in Singapore. From a longer-term perspective, the office segment in Singapore will remain strong given favourable supply and demand dynamics. Malaysia will continue to suffer from prolonged oversupply conditions due to uncontrolled supply of office space in the past. The COVID-19 pandemic and plunge in crude oil price are expected to affect this segment in Malaysia more severely.
  • Hospitality segment will take time to recover. While we have started to see value in some Singapore hospitality REITs, they will likely be range bound until the pandemic is contained. Plans for large-scale tourism redevelopment should underpin recovery in the sector.
  • Retail sector the hardest hit. The partial closure of many shopping malls, pressure from tenants to reduce rentals, rental deferments, and the potential exit of tenants are immediate threats for the retail segment. The retail segment in Singapore will also undergo a structural shift given the rising e-commerce trend. In Malaysia, we are only positive on REITs that own anchor malls in the Klang Valley due to lower negative revaluation risk. The smaller malls may see survival risk going forward.
  • OVERWEIGHT. While we remain positive on REITs, we urge investors to be selective. Our Top Picks are ESR REIT, Suntec REIT and Manulife US REIT in Singapore, and Axis REIT and KLCCP Stapled in Malaysia.

Source: RHB Securities Research - 24 April 2020

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