SC implemented the new revised Guidelines on Listed REITs effective on 9 April 2018. The leading modification would be the eligibility to acquire vacant land for property development. This would stimulate greater opportunity and contribute to positive growth. We believe the revival in domestic spending would sustain in 2018, leading to stronger retail sales volume, hence favourable to retail REITs. The OPR hiked in January has affected the value of KLREI by -11.4% (YTD). We foresee a stable MGS yield on the back of no expectation of further OPR hikes in 2018. The current share price weakness poses an opportunity to collect M-REITs with healthy profiles. While we maintain our NEUTRAL rating on REITs, we continue to like MQREIT (highest yield within coverage at 8.5%) and IGBREIT (concentrated prime assets).

Revised REIT Guidelines. The long-awaited revised Guidelines of Real Estate Investment Trust has taken effect on 9 April 2018. The revised guidelines focus on four major subjects: REITs’ investments, valuations, operational matters and Islamic REITs. We feel the guidelines enhance clarity and improve flexibility to drive the sector. Major amendment would be to grant REITs to acquire vacant land for the purpose of property development. Another apparent highlight would be the rulings on Islamic REIT, specifically on the weightage of Shariah non-compliant tenants.

Revival of Domestic Consumption. There are signs of revival in domestic consumption as we see a raise in domestic spending, through the growth in retail sales index by 9.5% YoY in 2017 with continued positive momentum in Jan 2018 (8.5% YoY). Secondly, Consumer Sentiment Index (CSI) showed improvement since 2015 (63.8; 2016: 69.8) and ended at 82.6 in 2017. Thirdly, private consumption also showed an increasing trend, with gradual improvement since 2015 (6.0%; 2016: 6.1%) and ended 2017 with 7.0%. Also we expect this trend to sustain throughout 2018 (BNM: 7.2%). Fourthly, the recent strengthening of the RM (YTD: 4.3% vs USD) may lift consumer sentiment into 2018 and spur stronger consumer spending, leading to stronger retail sales volume. Hence, we believe that domestic consumption should augur well for retail driven REITs, such as IGBREIT, PREIT and SUNREIT.

OPR Hiked Realised. As widely anticipated, overnight policy rate (OPR) was hiked by 25bps, from 3.00% to 3.25% in January which resulted to the KLREI declining 11.4% YTD. While the yield spread may have widen following the share price retracement, we foresee a fairly stable Malaysian Government Securities (MGS) yield on back of minimal holdings by short-term foreigners and with the expectation of no further OPR hikes for the remainder of 2018. As such, the recent weaknesses in share price present an opportunity to accumulate M-REITs with healthy profiles.

Forecast. We maintain our assumption of 10-year MGS yield of 4.1% and valuations based on 2-year historical average yield spread. We reduce our earnings forecast for CMMT and SUNREIT. We cut CMMT’s FY18-20 earnings forecast by 11%-15% to reflect the weaknesses of its malls in Klang Valley. Apart from that, we reduce SUNREIT’s FY18-20 earnings forecast by 4%-6% to reflect lower assumption of overall rental reversion but mildly offset by the contribution from Sunway Clio.

Rating. While we maintain our NEUTRAL rating given the sluggish outlook of M REITs, we feel that the recent share price correction provides opportunity to accumulate on selective REITs. We believe major REITs are still stable with sustainable yields.

Top Picks. Our top picks are MQREIT (BUY, TP: RM1.44) given its sustainable attractive dividend yield of 8.5% (highest in our coverage) and IGBREIT (BUY, TP: RM1.75) due to its prime location assets with high footfall.

Source: Hong Leong Investment Bank Research - 17 Apr 2018