Saturday, 14 January 2017

(The Star) Analysts see disconnect between MGS and MREITs

Kenanga Investment Bank Bhd’s equity research head Sarah Lim Fern Chieh and senior equity analyst Marie Suwrna Vaz give a back to basics question and answer session on the Malaysian real estate investment trusts (MREITs) sector.
What is the correlation between Malaysian Government Securities (MGS) and MREITs?
REITs, in general, are supposed to track the bond market, a proxy to it.
So Malaysian REITs (MREITs) track the MGS.
There is usually a 2% difference in the spread between MGS/MREIT yield. However, there seems to be a narrowing of this spread.
We are seeing a disconnect between the two.
Using Donald Trump’s win on Nov 8, 2016, MGS yield has increased 15% after his victory.MREIT share prices should go down but they did not correct as much (1% to 7% only) as how the MGS yield corrected.
Therefore, the different in the spread between MGS yield and MREIT yield have narrowed, especially in November and December 2016. So there seems to be this disconnect between MGS and MREITs.
But although it tracks the bond market, this is only to a certain extent, especially with the case of MREITs recently.
What is the reason for this disconnect? There seem to be a disconnect between the ringgit and oil price, and now MGS yield and REIT prices?
Usually, if the ringgit weakens, the MGS yield will increase because people are selling the MGS as they are held by a big percentage of foreign investors (48.4% in November 2016).
However, MREIT share prices have held up relatively well even though the MGS was sold down – this is largely due to MREITs being highly institutionalised by local shareholders who tend to take a longer term view and have held these MREITs since listing.
How do you see earnings from MREITs going forward?
Earnings from MREITs are stable, at least for the next one or two years.
Now let’s look at shareholdings. It is heavily institutionalised.
Where are the institutions going to park their money? There is a lack of investment opportunities.
If you have held them for so long since the listing days, will you dump it? No.
So it is worthwhile to hold them for defensiveness, that is, less volatility in share price.
We believe people are favouring MREITs because they are still giving 5% to 6% plus yield compared with putting your money into fixed deposits.
Shareholding structure of MREITs lean heavily towards institutions. That a good thing?
Most investors are institutions. They bought into them since its initial public offering (IPO) days.
If you are a retail investor, you may have bought them also and may be patiently keeping them.
There is good and bad to this (being so institutionalised).
It means stability but you will also not be able to see the liquidity there. The volume traded is thin.
Can the sector be compared with Singapore REITs (SREITs)?
SREIT sector is a different animal. It is more volatile because its policy and capital structure differs from MREITs. Its property market, upon which real estate investment trusts are based, is also more volatile than Malaysia.
Additionally, SREITs may have higher foreign shareholding while MREITs tend to have more local institutional shareholding.
SREIT yields are generally about one to two ppt (percentage points) higher than ours. Average SREIT yields are 7.2%
Then it is a good idea to invest in MREITs since they provide a 5%-6% plus yield?
You cannot look at REITs that way. Although 5%-6% may seem good, if the share price goes down, naturally, the yield will go up.
So you got to look at yield versus share price, a two-pronged attack – it is good to look at each of the REIT’s underlying assets to ascertain quality of its earnings. If the earnings are sustainable, there is less risk to the MREIT share price.
If you want to go for something very defensive – capital preservation with some yield – then yes, REIT is the way to go.
You think it is all right to hold on to MREITs?
Most of the MREITs we cover would be able to maintain their earnings due to prime asset positioning.
If you have been holding them for last three years, (the ones Kenanga is tracking), chances are you are still in the money.
Markets are volatile today and will continue to be so going forward.
There is a lot of unpredictability. I may not make a lot of money (with REITs), but I will also not lose so much money, unless you are a foreign investor where there is foreign exchange or FOREX risks.
Foreign shareholding is very low, at mid to high single digit – so the risk of a foreign shareholders’ selldown is minimal with MREITs.
So it is not just a toss between bonds versus MREITs.

You have to look at shareholding structure, from the investor’s point of view.