Wednesday, 7 June 2017

(The Star) Lower bond yields boosts investor appetite for M-REITs

PETALING JAYA: The recent fall in government bond yields bodes well for investor appetite for Malaysian real estate investment trusts (M-REITs).

According to analysts, M-REITs have regained their attractiveness as an investment class in recent weeks, following the widening of the yield spread between the instrument and the Malaysian government securities (MGS) on the back of lower bond yields.

MIDF Research, for one, noted that yields of the benchmark 10-year MGS had fallen below 3.9% last month from 4.1% in April amid ongoing inflows of foreign funds and the strengthening of the ringgit.

“The decline in MGS yields is positive for M-REITs, as it widens the yield spread between M-REITs and MGS, thus making M-REITs more appealing,” MIDF Research said in its report.

“Nevertheless, we reckon that a further decline in MGS yield is required to provide a stronger catalyst for M-REITs,” the brokerage added.

The 10-year MGS yield is currently hovering at around 3.85%, which is close to its five-year mean of 3.8%.

Despite the recent weakeness in the 10-year MGS yields, MIDF Research said it would maintain its yield forecast at 4% for the debt paper this year.

Meanwhile, Kenanga Research said it was considering a move to upgrade its outlook on M-REITs in view of the decline in 10-year MGS yields, coupled with a potentially tough quarter ahead in terms of corporate earnings.

“We are considering upgrading our sector call due the recent MGS compressions,” Kenanga Research wrote in its strategy report.

“The 10-year MGS has been consistently trending downwards since April 2017, likely on better Malaysian economic data, while potential upsides (including upcoming interest rate hikes) have been priced in.

“As such, we may look to lower our 10-year MGS target closer to 4% (compared with 4.2% currently) which could potentially increase our target prices of M-REITs by 3.3%-4.2%,” the brokerage explained.

Pavilion REIT (PAVREIT), MRCB-Quill REIT (MQREIT) and IGB REIT are Kenanga Research’s top picks for the M-REIT sector.

It liked PAVREIT for the fund’s asset-acquisition potential; MQREIT for its stable assets and dividends, offering one of the highest yields within the sector at 6.5%; and IGB REIT for asset stability and relatively high yields vis-a-vis its peers at an average of 5.8%.

Conversely, MIDF Research’s top pick is Sunway REIT (SUNREIT). The brokerage also has a “buy” call on AmanahRaya REIT (ARREIT).

“Our top pick for the sector is SUNREIT, as we are positive on its retail division, which is underpinned by the resilient performance of Sunway Pyramid shopping mall. Its office division is expected to recover in 2017 as the worst is over for the division,” MIDF Research said.

“We have ‘buy’ call on ARREIT, as we like its asset portfolio with education property exposure and attractive dividend yield of 5.8%.

“We are also positive on the entry of Kenedix (a Japanese real estate asset management company) which should bode well for the asset management prospect for ARREIT,” explained the brokerage, which had maintained its “neutral” stance on the M-REIT sector as a whole.