• Downward pressure on REITs could continue due to the weak MYR and further foreign sell off of domestic bonds.
• REIT-ing  of  WCT’s  retail  malls could  create  some  excitement in 2H15.
• Maintain NEUTRAL on the sector, KLCCP is our top BUY (TPl: RM 7.73) .

What’s New

The  re-pricing  of  M-REITs  could  continue  in  the  current  volatile yield environment  due to  the weak MYR and further foreign selloff of domestic bonds.  We  may ,  however ,  see some room for re-rating the  M-REITs  once  the  MYR  volatility  and  foreign  fund  outflows subside,  probably  in  2H15,  supported  by  a  low  interest  rate environment.  Weak  economic  data  in  the  Eurozone  and  Japan  as well  as  China’s  slowing  economic  growth  suggest  monetary  easing will continue and interest rate hikes may be pushed back.

The  REIT-ing  of  WCT’s  retail  assets  worth  MYR2b  in  asset  value could create some excitement in 2H15.

What’s Our View

The time is not  ripe to  be bold  especially in 1H15  due to  the  high volatility in  the  MYR and bond yields.  Historically, the yield spread between  the  10-year  MGS  and  M-REITs  has  been  about  308  bps (2011-2014),  but  this  has  since  narrowed  to  241bps  currently.  The risk  is  that  the  spread  could  normalize  as  investors  demand  a higher  risk  premium  over  the  MGS  yield  and  this  would  imply  a further downside of -7% to -12% in M-REITs’ unit prices. We had  adjusted  our TPs  by  -0.7% to +7.8%  in  our  market strategy report  on  18  Dec  2014  after  reviewing  our  assumptions  for:  1)  the risk  free  rate  which  was  raised  to  4.2%  from  4.0%,  2)  betas  which were revised to 0.5-0.9 (from 0.57-0.9) and 3) terminal cap rates. Maintain BUY  on KLCCP  and  CMMT (TP: RM 1.59)  but  lower  PavREIT (TP: RM 1.49) to HOLD  due to share price out performance. We  remain  HOLDERs of AXRB (TP: RM 3.40), Quill Capita (TP: RM 1.15), IGBR (TP: RM 1.29) and SunREIT (TP: RM 1.36).

Source: Maybank Research - 12 Jan 2015