Source: HLIB Research
KUCHING: Real Estate Investment Trusts (REITs) in Malaysia continue to offer good exposure of a more defensive play in the current volatile market.
This was on the back of other investment vehicles either directly or indirectly affected by various negative sentiments such the rise in gas and electricity charges for commercial tariffs earlier this year, increase in petrol prices and the abolishment of sugar subsidies.
The research team at Hong Leong Investment Bank Bhd (HLIB Research) noted that for REIT management companies, utilities expenses contributes high portion of the total operating expenses, usually at about 40 per cent.
“Mall operators experienced high electricity consumption especially in running air-conditioning which represents the largest operating cost of a shopping centre,” it said.
“As such, the hike in average commercial electricity tariff from 41.01 sen per kWh to 47.92 sen per kWh has significantly affected shopping mall.
“In addition to the changes in electricity tariff and quit rent and assessment rate, there is also negative sentiment in the market arising from increase of RON95 petrol price in Oct 1, 2014 and also abolishment of sugar subsidy of RM0.34 per kg on Oct 26 last year.
“This has resulted in higher prices of retail goods and services, foods and beverages as well as logistic cost.”
Despite all the negative sentiments hovering in the market, HLIB Research noted that majority of M-REITs has continuously reported stable improvement in rental income as management companies are able to transfer extra cost arising from the increment back to tenants via increase in rental rates or service charges.
“Based on our channel checks, prime retail malls have a long queue for tenant that is waiting to get a space in the mall. For example, Pavilion currently has over 200 potential tenants in their waiting list.
“The previous fear of negative impact of rising cost – like electricity, assessment, quit rent and so on – is now proven to be unsubstantiated as REIT operators have been able to pass on the higher cost to tenants via rental reversion or service charge.
“Despite lowering tax rate for quit rent and assessment from 12 per cent to 10 per cent, Dewan Bandaraya Kuala Lumpur (DBKL) has increased the property valuation which has leads to surge in quit rent and assessment expenses.
“We understand that management companies have submitted their applications to DBKL to revalue the properties downwards and we expect the reimbursement will be made in the next quarterly results announcements.”
Looking at the global and domestic outlook, HLIB Research said recent macro developments pointed to a more favourable outlook for the REIT sector.
“Of significance, expectations of further Overnight Policy Rate hike by Bank Negara Malaysia (BNM) have recently faded after BNM paused in September,” it stated. “Coupled with the absence of demand-driven inflation, we expect BNM to hold the OPR steady until end-2014.”
The prospects of a more moderate GDP growth as well as steady interest rates environment reinforced by recent volatility in the financial market could prompt the return of appetite for defensive sectors such as REIT.
“In this regard, we believe that the REIT sector offers a good exposure of a more defensive play in the current volatile market.”