Highlights

REIT yields have continued to rise since our last sector update, and we maintain our neutral outlook.

Less attractive Asia. We opine that Emerging Asia now looks less attractive than US and Eurozone, which are showing signs of recovery. Emerging Asian countries now have to contend with policies to tackle fiscal deficits which will hamper fiscal spending, thus removing a booster for economic growth in the region, and Malaysia will be no exception.

Domestic situation unexciting. At the same time, we believe Malaysia is set to embark on a tightening path, on back of higher inflation outlook and contractionary Budget in 2014, albeit with slightly stronger GDP growth.

Govvie yields pricing in OPR rate hike. We have observed that 3 year MGS yield has risen 30bps since Nov, a strong sign the consensus is pricing in a 25bps rate hike in 2014, we believe in 2H as a result of a combination of higher inflation and improving economic outlook. The Fed’s tapering could also drive up MGS yields.

Widening 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 showing expansion in yield spread going forward.

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

No buy calls. 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 (albeit at slower growth rate); (2) High consumer confidence and strong employment market; and (3) Malaysia’s tourism boom from Visit Malaysia Year 2014.

Risks

Over supply issues for office space in Klang Valley.

Rating

NEUTRAL

Positives: CMMT, Sunway REIT, Pavilion REIT and IGB REIT provide investors with 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 RM1.21) and CMMT (HOLD, TP RM1.26) for their pure play exposure to the retail segment.

Source:Hong Leong Investment Bank Research - 3 Jan 2014