We are optimistic on the steady recovery for both the retail and hotel segments (driven by relaxation of MCO). Separately, we believe the office and industrial segments will continue to remain stable. With MGS yield rising since end Feb, we now increase our average MGS assumption to 3.25% (from 3%) vs the current level of 3.1%. Also, we re-compute our 2 year historical average yield spread from 2019-2020 (instead of 2018-2019), and roll forward our valuation to FY22. We maintain NEUTRAL on the sector, with Axis REIT (TP: RM2.48) as our top pick.

Progressive improvement in retail and hotel segment. When inter-state borders eventually reopen, we expect a gradual respite from domestic holiday-goers as well as business travelers; this should aid recovery in occupancy for hotels. With the government allowing interstate travel activities between RMCO states (10 Mar), hotel occupancy rates were seen to increase to 33% from the lower rates in Jan (20%) and Feb (18%). We also foresee continuous improvement in the retail segment aided by relaxation of restrictions and pent-up local demand backed by “revenge spending” and upcoming festive season (Hari Raya). This former effect was witnessed during last year’s RMCO (10 June to 12 Oct); as its current footfall of malls have recovered close to RMCO levels, based on our channel checks. Moreover, the continuation of 10% electricity tariff rebate (till Jun 2021) would aid in reducing of operating costs. While rental assistance would still be given to affected tenants, as we understand the quantum is reducing. Furthermore the national vaccination program (which should gain significant traction in 2H21) would drive up overall sentiment as we progress on the path to normalcy.

Office and industrial to remain resilient. As the economy slowly recovers, in addition to the vaccine roll out plan, we expect more employees to gradually return to office with fewer on working from home (WFH) arrangements. On that note, we expect the demand for office space to remain resilient for the rest of the year. Meanwhile for industrial REITs, the segment has been steady all along, backed by exceptional growth of the e commerce sector that was seen during the pandemic. We observed that as online shopping becomes the new norm, it has created a strong tailwind for warehousing and logistics companies. Hence we believe industrial REITs will continue its stability and growth trajectory in 2021.

OPR to remain at 1.75% in 2021. Our economics team expects BNM to maintain OPR at 1.75% for the rest of 2021. Although we do not feel the hotel segment will recover radically in the near term, we reckon the current low level of OPR would be favourable for REITs. This will give REITs the advantage of having lower borrowing costs for future acquisitions.

MGS rising steadily. MGS yield has been on the rise since Feb, currently at 3.1% (highest YTD: 3.48%). On the other hand, yield spread between REITs in our coverage and the 10-year MGS (MAG10YR) is currently at 306bps which is around +1SD of its 5-year mean of 340bps. To keep abreast with the current 10-year MGS yield, we take the opportunity to increase our average MGS assumption to 3.25% (from 3%) vs the current level of 3.1% (YTD average: 3.0%), implying around +0.75SD of its 5-year mean. Also, we re-compute our 2 year historical average yield spread from 2019-2020 (instead of 2018-2019), and roll forward our valuation to FY22.

Maintain NEUTRAL. We maintain NEUTRAL on the sector. Our top pick is Axis REIT (TP: RM2.48) with strong resiliency throughout the pandemic driven by increased popularity in industrial properties, high occupant tenancy in its diversified portfolio and also one of the few Shariah compliant REITs.

Source: Hong Leong Investment Bank Research - 13 Apr 2021