Highlights

• Stable outlook with inorganic growth focus. We remain positive on M-REITs given its stable and sustainable yielding nature. Downside risk of narrowing yield spread is limited given the ongoing monetary easing bias. We advocate overweight stance on M-REITs, especially companies with inorganic growth potential, sustainable yield, good quality asset, and strong management.

• Revision of REIT Guidelines. The new REIT guideline is expected to come into force by end 2016/early 2017 after industry consultation. We believe the revision will make REIT a more dynamic and attractive investment vehicle. Besides allowing for green field development, private leases, property management and potential M&A activities will spice up this usual stable space.

• Potential risks kept in check. The threshold of allowing development activities is only up to 15% of enlarged asset base alongside with other check and balance provisions, i.e. minimum asset holding period of 2 years after completion.

• Looking across the straits. Drawing the inferences from S REITs, the positive market tendency on (re)development activities is strong. We can expect the average gearing and share price volatility for M-REITs to increase given the potential higher yield that could be garnered from the newly found growth avenues.

• Top beneficiary. The main beneficiary, in our view, is Axis REIT, who exhibits strongest tendency, capabilities and suitability to benefit from the proposed changes. However, these benefits will only emerge over a longer-term horizon. Besides, the high gearing, loss of income for PDI centre and slow take up rate for some properties continue to limit its near term outlook.

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.

• The proposed changes of REIT guideline.

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

• Maintain OVERWEIGHT given its stable and sustainable yielding nature and stay invested in REITs with sustainable yield, good quality asset, and strong management with potential inorganic growth in view of softer property price.

Top Picks

• Maintain our BUY call on MQREIT (TP: RM1.34) given its sustainable attractive dividend yield circa 7% and stable assets.

• Maintain BUY (TP: RM1.95) on PREIT with income growth potential organically and inorganically with FY17 projected dividend yield at 5.3%.

• Maintain BUY on KLCCSS (TP: RM8.35) in view of stable income and yield from quality assets within shariah compliant space.

Source: Hong Leong Investment Bank Research - 12 Oct 2016