Highlights

• Upward bias MGS. We expect an upward bias for the yields of the Malaysian Government Bonds (MGS) in view of the expected rise in overnight policy rate (OPR), which may lead to the narrowing yield spreads and placing pressure on REITs’ share prices. Besides, the earnings for REITs may also face some downward pressure from higher borrowing costs and dampen the opportunity for future acquisition.

• Improving economy. Malaysia’s moderate yet strong growth is expected to remain resilient driven by both public and private sectors’ expenditure, supported by higher income and stable labour conditions. Together with the strengthening bias of Malaysian Ringgit (RM), consumer sentiment may continue to improve and leads to stronger retail sales volume growth.

• Retail REITs. Oversupply of retail space to worsen with new malls entering the market. However, major retail REITs under our coverage appear to have promising occupancy rate in 2018, due to the improvement of Malaysian economy as well as active asset enhancement initiatives (AEI) to keep the respective retail spaces relevant.

• Office REITs. Mismatch between supply and demand widens. Nevertheless, the completed and upcoming MRT Lines are expected to boost demand in the long run. REITs with long term tenants can still achieve positive rental reversion and maintain the occupancy rates.

Catalysts

• Potential acquisitions of quality asset to achieve growth.

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

• Active asset enhancement initiatives to draw new customers and maintain existing ones to promote retail sales volume growth.

• Proposed changes of REIT guidelines to facilitate growth.

Risks

• Lacklustre consumer sentiment.

• Failure to execute the planned asset injections and strategies.

• Significant slowdown in macroeconomic activities.

Ratings

NEUTRAL ( ↔ )

• Maintain NEUTRAL given that M-REITs yield is less attractive at current level especially with an expectation of rise in OPR. However, we believe major REITs are still stable with sustainable yields.

• We revise our assumption of 10-year MGS yield to 4.1% from 4.0% previously and valuations are based on 2-year historical average yield spread.

Top Picks

• MQREIT (TP: RM1.42 ) given its sustainable attractive dividend yield of 7.3% and stable assets with high occupancy rate and healthy WALE.

• IGB REIT (TP: RM1.78 ) with promising positive rental reversion and occupancy rate due to the asset’s prime location curbing the challenging retail environment.

Source: Hong Leong Investment Bank Research - 18 Jan 2018