Highlights

Looking into 2016, we deem the outlook for M-REIT to be challenging with the prevailing cautious consumer sentiment. Nevertheless, a normalisation in consumer sentiment towards 2H16 can be expected given a potential recovery of MYR amid bottoming of crude oil price. Reinforced by an expected narrower spread, we expect a marginal organic growth from the sector. That said, non-organic growth may continue to exist given acquisition opportunity arising from softer property outlook. Given the cautious investors sentiment in an uncertain market envi ronment, we continue to maintain NEUTRAL on MREIT sector.

• Retail: we expect slower rental reversion rate for some mall operators in view of the projected slower retail sales volume growth amid slower economic growth, and subdued consumer sentiment. Huge NLA supply in the pipeline and rising ecommerce are some other negatives.

• Office: We expect slow rental reversion outside of KLCC area. Upcoming planned capacity plus mega projects such as Tun Razak Exchange may exacerbate oversupply of office space. Businesses may also postpone their expansion plan given the uncertain economic outlook. Nevertheless, softer market outlook may present opportunity for acquisition of quality assets.

• Industrial: Malaysia’s manufacturi ng production growt h continues to remain stable, supported by a boom in export - oriented industries which more than offset a more moderate growth in domestic sectors.

Catalysts

• Potential acquisition of quality assets to achieve growth as softer property outlook presents such opportunity.

• Potential recovery of MYR towards 2H16 may spur retail spending which will boost retail REITs.

• Sustainable source of income accorded by long-term rental contract for office REITs.-.

Risks

• (1) Aggressive monetary policy tightening by BNM; (2) Prolonged erosion in consumer sentiment; (3) Failure to execute the planned asset injections; and (4) Significant slowdown in broad economic activities.

Top Picks

• We maintain our BUY call for MQREIT (TP: RM1.29) given its high dividend yield around 8.4% and huge pipeline of assets injection from its sponsor.

For exposure in industrial space, Axis REIT is preferred with stable income stream with less risk given the longer term lease nature for industrial assets. Remain HOLD (TP: RM1.65) with dividend yield at 5.7%.

• Among retail REITs, we prefer SUNREIT (BUY; TP: RM1.55), a diversi fied REIT operator with dividend close to 7%. We expect potential diversified asset injections by its sponsor, Sunway Berhad.

Source: Hong Leong Investment Bank Research - 11 Jan 2016