THE resumption of economic activity amid the easing up of lockdown restrictions has seen equity analysts maintaining their upbeat outlook on Malaysian real estate investment trusts (REITs), particularly in the retail and office segments.
Kenanga Research believes the fourth quarter of 2021 should see a significant improvement for the retail segment’s earnings in the form of revenge shopping and hospitality segment from an uptick in local holiday stays.
“Investors should be looking ahead to normalised financial year 2022 (FY22) earnings.
“The quick rollout of vaccinations and the resumption of most economic activities are well within our expectation of a fourth-quarter 2021 earnings rebound,” says Kenanga Research.
The research unit points out that the economy had begun opening up in August and September 2021, with most malls currently operating at 80% to 90% of net lettable area (NLA), versus only 15% to 25% in the second quarter of 2021.
The research unit also notes that the office and industrial segments under its coverage have been fairly stable, as businesses were able to operate effectively on a work-from-home (WFH) basis without significant disruptions to operations.
However, Kenanga Research opines that over the long run, offices may see a decline in demand, either from shorter lease terms or tenants requiring smaller office space as the WFH policy may be here to stay and is cost effective.
This is further exacerbated by the pre-existing oversupply of offices in the Klang Valley, which will continue to put downward pressure on office prices.
“That said, this situation does not apply to KLCC REIT, which operates heavily in the office segment, as most of its leases are already secured on long-term basis (over 10 years versus retail of two to three years) and with easy-to-manage triple-net-lease structure,” says Kenanga Research.
The research firm maintains its “overweight” call on the REIT sector and its preferred picks are Axis REIT (outperform; target price RM2.15) and KLCC REIT (outperform; target price RM7.35) in light of their rock-stable earnings.
Meanwhile, UOB Kay Hian Research says as Malaysia’s economy reopens, businesses would have a more positive attitude towards capital expenditure, which could lead to higher demand in office space, supported by the rebound in domestic consumption.
UOB Kay Hian Research points out that offices in strategic locations will continue to be resilient, as evidenced by KLCC REIT and Sentral REIT’s steady earnings throughout the pandemic.
It is worth noting that average rental rates in the Kuala Lumpur City Centre continue to remain under pressure at RM6.90 per sq ft.
“Although the industry is still grappling with oversupply, we believe that selected office REITs (strategically located with good connectivity like KL Sentral) will benefit from higher demand for office space amid the evolving landscape.
“Moreover, the average rental rates in KL Sentral are attractive at RM6.46 per sq ft,” says the research unit.
UOB Kay Hian Research also opines that as supply outstrips demand, depressed rental rates may arise as by end-2021. A total of 11 office buildings are slated for completion in the Klang Valley, adding about five million sq ft or 4.5% to existing office space.
In a report by Knight Frank, four offices in Kuala Lumpur city (1.7 million sq ft of NLA) were completed in the first half of 2021, namely Menara IQ (formerly HSBC Tower) at TRX, Permata Sapura, Menara Great Eastern 2 and TS Law Tower.
UOB KayHian Research has “buy” calls on KLCC REIT (target price RM7.60), Sunway REIT (target price RM1.55) and Sentral REIT (target price RM1).
The research unit says KLCC REIT’s earnings will be boosted by the retail segment, in addition to its stable office segment, while its dividend discount model (DDM) target price is based on a required rate of return of 6.4%, supported by an implied yield of 4.6% for 2022.
As for Sunway REIT, UOB Kay Hian Research expects second-half 2021 earnings to be stronger than first-half 2021 while its target price is based on the DDM (required rate of return: 6.4%, terminal growth: 1.6%), with an implied dividend yield of 5.1% for 2022.
Also, the research unit says Sentral REIT’s high dividend yields (backed by its property portfolio’s stable occupancy) of 8% to 9% for 2021 to 2023 are attractive in the current market.
Sentral REIT’s prime assets, Platinum Sentral and Menara Shell (contribute over 60% to topline), are located strategically in KL Sentral, with good connectivity.
“Moreover, rental rates in KL Sentral are attractive and slightly lower than KL City Centre which would drive office demand,” says UOB Kay Hian Research.
Meanwhile, MIDF Research expects Al-’Aqar Healthcare REIT’s long-term earnings outlook to remain stable going forward due to steady performance of healthcare assets, and estimates its distribution yield at 5.4%.
The research unit maintains a “buy” call on Al-’Aqar REIT with unchanged target price of RM1.40, based on DDM.
MIDF Research reports that Al-’Aqar REIT may offer rental rebate to its tenants in the second half of 2021 as performance of hospitals were impacted by the full lockdown.
“However, looking beyond FY21, Al-’Aqar REIT management does not expect the rental rebate to recur in FY22 as performance of hospitals are expected to improve in FY22,” says the research unit.
AmInvestment Bank Research also says REITs are poised to benefit from an expected rebound in Malaysia’s post-pandemic economy, and those (IGB, Sunway, Pavilion and YTL Hospitality) under its coverage are estimated to provide distribution yields of more than 5% for FY23 and beyond.
The research unit also notes that occupancy rates at anchor malls of retail REITs under its coverage remain healthy at above 90%.
“While the occupancy rates for malls of retail REITs under our coverage have shown a slight decline, we are not particularly perturbed by this development, as the companies have guided that they are slowing down their discussions in renewing or replacing tenants during the lockdown,” says AmInvestment Bank Research.
This is because landlords are in a less favourable bargaining position in rental rate discussions during this period.
Not helping either is the longer transition period between tenant replacements, as renovation works were delayed due to the various movement restrictions in place.
In terms of financial health, the REITs under AmInvestment Bank Research’s coverage continue to maintain a healthy debt-to asset ratio of 23% to 41% versus 60% of the regulatory threshold (temporarily raised from 50% up to Dec 31, 2022 by the Securities Commission as a Covid-19 relief measure), which allows the REITs to gear up for further acquisitions.
Also, REITS are actively scouting for quality assets and do not rule out potential acquisitions over the next 12 to 18 months if any yield-accretive propositions emerge, which could drive the REITs’ medium to long-term growth despite short-term earnings pressure.
The research unit notes that players such as Capital Land Malaysia Mall Trust and KIP REIT have started raising capital for asset acquisitions.
AmInvestment Bank Research’s top pick is Sunway REIT (fair value RM1.66) for its diversified investment portfolio (which includes retail malls, hotels, offices, plus a university and hospital) and the large pipeline of potential assets for future injection.