We maintain our Overweight rating on the Malaysia REITs (MREITs), as we believe the defensive earnings of high-quality MREITs make them an ideal investment proposition during economic uncertainty. In addition, the dovish stance from major central banks should lead to further rate cuts, thereby boosting the appeal of MREITs as a yield play. That said, we share investors’ concerns that some assets (retail malls, offices, hotels) are oversupplied and a slowing economy may affect retail spending / demand for industrial properties. Stockpicking is, in our view, vital in the current market environment. Our top sector picks are KLCC (BUY) for its sustainable yield and Axis REIT (BUY) for its high yield and sector-leading EPU growth in 2019E.

Ideal Investment During Economic Uncertainty and Falling Bond Yields

Affin Hwang Research is cautious on the KLCI market outlook – corporate earnings revisions remain negative and this trend could sustain should trade tensions persist, leaving limited grounds for the KLCI to trade above its current PE multiple. Elsewhere, the recent dovish shift by the major central banks signals impending cut(s) in the global benchmark rates. This may, in turn, lead to a lower overnight policy rate (OPR) in 2020. We believe the high-quality MREITs are an ideal investment, given current market conditions – defensive assets are preferred during economic uncertainty while failing bond yields (MGS) should support valuations.

Investors’ Concerns – Oversupply of Properties, Vacancy Rates

During our recent marketing meetings, investors were broadly receptive to our Overweight rating. We sense that investors are generally neutral or positive on the MREITs, despite MREITs’ stellar YTD share-price performance. Investors’ major complaint lies in the lack of trading liquidity, while their key concerns hover around the oversupply of properties (retail malls, offices, hotels) and the impact of slowing economic growth to vacancy rates / rental growth.

Stock-picking Is the Key; Top Picks Are KLCC and Axis REIT

We share investors’ concerns. We believe that stock-picking is vital for investing in the current market environment - we recommend investors stick to the winners with prime assets and proven earnings track records. Our top picks are KLCC (BUY, TP RM8.55) for its defensive earnings and Axis REIT (BUY, TP RM2.04) for its high yield of 5.4%. We also like Sunway REIT (BUY, TP RM2.06) for its diversified asset base.

HOLD on Retail REITs: Weak Consumer Sentiment, Fair Valuations

We maintain our HOLD ratings on Pavilion REIT and IGB REIT. Whilst we expect their prime shopping malls to continue to enjoy high occupancy due to their first-class locations and good tenant mixes, the weak consumer sentiment may dampen their rental growth. Importantly, at 4.8-4.9% 2019E yields, we believe investors have largely priced-in the positives.

Source: Affin Hwang Research - 23 Jul 2019