Highlights

With the recent rise in REIT yields, we now address the various sector issues:

Govvie yields shooting up, due to concerns Fed tapering. Since mid-May, the key benchmark MGS yields have risen by 75bps on average (Figure #1), leading to a corresponding pressure on REIT yields.

Narrowing yield spread. Over the past few years, the spread between M-RETIs vs. MGS has been consistently narrowing due to abundant liquidity which has led to hunt for yield. However, the trend is now reversing, with recent data suggesting the cycle could reverse, leading to an expansion in yield spread going forward.

Consumption to moderate in 2014. We expect household consumption, which has been one of the key themes of the sector, to moderate due to: (1) High household debt level of 83%; (2) Lower commodities income for rural small holders; and (3) The waning wealth effect.

Risk of BNM raising interest rates in 2014. With OPR at 3.0%, they have very little scope to reduce rates in the face of sustained GDP growth. We see a rate hike as being more likely to occur over the longer term. Moreover, Fed tapering could induce further upward pressure on MGS yields, even without any rate hikes.

Fundamentals still intact. Notwithstanding the above factors, we still foresee earnings will remain essentially intact, hence we make no changes to our earnings forecasts.

Time for stock picking. Given the headwinds, we do not have any Buy calls for M-REITs. However, for investors who still desire exposure, we prefer IGB REIT and CMMT for their pure play exposure to the retail segment.

Catalysts

Still-healthy fundamentals for the retail sector, underpinned by: (1) Sustained consumption theme in Malaysia; (2) Rising disposable income and discretionary spending; (3) High consumer confidence and strong employment market; and (4) Malaysia’s tourism boom.

Risks

Over supply issues for office space in Klang Valley.

Rating

NEUTRAL

• Positives: CMMT, Sunway REIT, Pavilion REIT and IGB REIT provide investors with direct exposure to the retail sector.
• Negatives: (1) Intensifying competition for retail assets; (2) Bleak outlook for office; and (3) Rising MGS yields.

Top Picks

• IGB REIT (HOLD, TP: RM1.36) and CMMT (HOLD, TP: RM1.70) for their pure play exposure to the retail segment.

Source: Hong Leong Investment Bank Research - 14 Aug 2013