About IGB REIT, The Malaysia REIT Industry ....

kiasutrader

Publish date: Thu, 18 Oct 2012, 09:35 AM

IGB REIT: It gives investor exposure to Malaysia's largest REIT by mar cap and second largest free float. Growth will be underpinned by organic growth in its existing retail assets ' Mid Valley Megamall and The Gardens Mall.

Located in the heart of Mid Valley City and on the fringe of the KL central business district, Mid Valley and The Gardens are supported by offices and mature affluent townships within and surrounding Mid Valley City. Footfall for the two malls has been stable at around 34 million per year despite rising competition from new malls. Its attractiveness will be further enhanced by ongoing and future mixed developments in the surrounding areas, which will further grow its catchment area.

IGB REIT is set to benefit from the upcoming MRT Circle Line under the Greater KL/Klang Valley integrated urban transport system via a proposed linkage from Mid Valley City to KL Eco City's Komuter/LRT/MRT station. Increased accessibility and connectivity will drive shopper traffic further, which will serve as a strong catalyst to IGB REIT's capital value and bargaining power for positive rental reversions.

IGB REIT has a good combination of mature and young assets. Mid Valley anchors the earnings base while the relatively young Gardens Mall provides significant room to grow average rental.

Some IGB REIT's rental income is backed by long lease agreements while the portfolio's tenancy expiry profile is well spread out with 39% of the tenancies due for renewal in 2013 and 31% in 2014.

IGB REIT has quality assets, earnings resilience and liquidity. It's relatively low 26% debt to asset ratio gives it the capacity to borrow another rm2.3 billion for asset acquisition.

Target Price: 1.43 (MIDF), 1.43 (Affin), 1.34 (Kenanga), 1.43 (RHB), 1.50 (CIMB)

The Malaysia REIT Industry

Even M-REITs'risk-free-rate' reference point or the 10-year Malaysian government securities (MGS) yield has been trending lower to the current (Oct 2012) 3.5%. Most M-REITs are trading at historically low gross yields (Oct 2012), not to mention record low spreads to the 10-year MGS yields.

M-REITs have undergone severe dividend yield compressions throughout the year (2012) as investors seek safe havens in defensive stocks, with most of them trading at historically low gross yields since 2009 or post-global financial crisis. However, M-REITs should command some premiums to the 10-year MGS or what consider a'risk-free-rate' asset as M-REITs, although defensive, are not completely risk-free. There is limited room for further yield compressions.

By analyzing the historical premiums of M-REIT gross yields versus the 10-year MGS since 2009 indicates that the thinnest M-REIT gross yield premium to the 10-year MGS yield is now (Oct 2012) + 0.9% to +1% which is derived from Pavilion REIT and IGB REIT's estimated FY12 gross dividend yield of 4.4% and 4.5%, respectively.

This forms the basis of the valuations for M-REITs (CMMT, Sunway REIT, Axis REIT) because both Pavilion REIT and IGB REIT M-REITs are commanding the lowest gross yield spreads because they are the top two largest M-REIT by market capitalisation, own 'landmark retail'assets in prime locations and have the highest retail asset exposure.

KLCC Property potential REIT-ing of its assets deserves better given their crme de la crme assets, which are located within KLCC precinct or the most prime address in town.

To recap, M-REITs have done well in recent months prior to Oct 2012, given the prevailing uncertain global economic environment, finding favor among the more risk averse investors. While REITs are not risk free, they did emerge comparatively unscathed from the last global financial crisis. Their yields have seen a fair amount of compression.

Among all the locally listed REITs, those operating in the retail segment are currently (Oct 2012) offering the lowest yields since this sector is widely seen as the most defensive on the back of expectations that consumer spending will stay resilient amid the external downturn.

Looking ahead (Oct 2012 & Beyond), many investors will stay with REITs even after taking account falling yields.

With slowing economies across all regions, there is no clear driver for growth, yet. The environment of extended low interest rates will in turn keep pushing investors to seek out higher yielding alternatives to government bonds, and at the same time take on higher risks.

Low borrowing cots also bode well for REIT incomes when loans are refinanced. Most of the locally listed funds have gearing levels ranging from 20% to 50%, the max guidelines under the existing rules.

To be sure, this downtrend in rates will reverse once the global economy regains traction. However this may not happen for some time yet. The US Fed lengthened its pledge to keep short term rates near zero to mid 2015 at least.

Furthermore, for those who fear all the liquidity will eventually lead to a flare up in inflation. REIT's underlying properties could offer investors a hedge against rising prices.

IGBREIT (5227)

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