Highlights

• Recently, we met up with management of several REIT companies under our coverage and they reiterated cautious view on the overall operating environment amid subdued consumer sentiment.

• Rental reversion rate is likely to be lower for upcoming expire NLA with slower yoy store sales growth. This is further dampened by the huge NLA supply in the pipeline and rising ecommerce popularity among shoppers.

• Notwithstanding the above cautious sentiment, M-REITs have outperformed KLCI into the 4th month of 2016, driven mainly by yield seeking sentiment among investors in low interest rate and uncertain economic environment. The retracement of 10- MGS yield to 3.75 from 4.1 in December and speculation of OPR cut also led to strong buying interest in fixed income securities.

• We are also of the view that local consumption may improve gradually in 2H16 given the normalization of GST effect and measures to support disposable income (i.e. EPF contribution rate cut, tax relief, civil servant pay rise and minimum wage hike).
• Given the challenging outlook shared and recent rally of share prices recently, which resulted in yield compression, we continue to remain NEUTRAL on M-REIT sector with preference on yield and stocks with good asset quality and strong management.
• For upcoming results, we believe that there should not be unpleasant surprises given its seasonally strong quarter in 1Q, which is likely to be offset by high base effect of pre-GST buying last year.

Catalysts

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

• Higher disposable income may spur retail spending which will in turn boost retail REITs.

• Regulatory intervention in limiting the supply for office/mall.

Risks

• (1) 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.

Ratings

NEUTRAL

• We maintain our NEUTRAL stance on the M-REIT sector given the overall cautious outlook despite the strong yield searching activities.
• We incorporate latest insights and updates gathered during our round of visits and impute a lower targeted 10-year MGS at 4% (previously 4.2%) in our valuation parameter for stocks under our coverage.

Top Picks

• We maintain our BUY call on MQREIT (TP RM1.24) given its high dividend yield of 7.5% based on FY16 DPU and imminent asset injection of Menara Shell.
• We downgrade SREIT (HOLD; TP RM1.58) to HOLD after the recent share price rally amid cautious near-term outlook.

Source: Hong Leong Investment Bank Research - 25 Apr 2016