Highlights

• Much to our surprise, BNM cut the OPR by 25 bps to 3% and we believe this will continue to spur market to move into yield assets as M-REIT is often the darling of equity investors during monetary easing due to its stability and high yielding nature despite its average yield being compressed to 6.2%.

• Moving forward, we expect the potential downside for M-REIT from external factors is limited with no immediate risk of narrowing yield spread given the monetary easing bias and its relative attractiveness amid the low yield envi ronment and uncertainties in the global market.

• In line with our previous expectation, local consumption is getting a further boost from the expected interest savings resulting from OPR cut, improved sentiment, on top of normalization of GST effect, festive seasons and measures to support disposable income; which is a relief to our earlier worry on softer rental reversion.

• While lower interest rate leads to potential lower interest expense, we do not expect significant interest savings for MREITs on its borrowing as majority of thei r borrowings >90% are in fixed rate, except for Axis REIT and CMMT, whose exposure to floating rate is circa 50% and 25% as of FY15.

• Another near term potential catalyst for the sector is the possible revision of REIT guidelines by SC to allow for green development up to certain percentage of total assets value, similar to Singapore and Hong Kong, who allows development up to 25% and 10% of the REITs’ total value, respectively.

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.

• Change in regulation with regards to green development.

Risks

• (1) Prolonged erosion in consumer sentiment; (2) Failure to execute the planned asset injections and strategy; (3) Significant slowdown in broad economic activities.

Ratings

• OVERWEIGHT

• Upgrade M-REIT to OVERWEIGHT on monetary easing bias with limited downside risk. The cautious outlook for REIT is relieved by the accommodative monetary conditions; coupled with stability, attractive yield and sustainable interest among investors in the low global yield environment.

• We revise our assumption of 10-year MGS yield to 3.5% from 4% previously and valuations are based on 1-year historical average yield spread, in-line with our house view on the possibility of further monetary easing in the near future.

Top Picks

• Maintain our BUY call on MQREIT (TP: RM1.34) given its high dividend yield of 7.3% and imminent assets injection.

• Maintain BUY (TP: RM1.98) on PREIT as banking on its income growth in FY17 post acquisitions and major reversion with DPU yield of 5.3% at current price.

• Upgrade KLCCSS to BUY (TP: RM8.38) after revising our MGS assumption and with expected improvement in its hotel operations come FY17 on top of its stable asset and premier assets location with a projected DPU yield of 5%.

Source: Hong Leong Investment Bank Research - 14 Jul 2016