Monday, March 1

Lower MGS yield a boon for REITs

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KUCHING: Real estate investment trusts (REITs) in Malaysia are set to benefit from lower yields in the Malaysian government securities (MGS) as the spread between dividend yield of REITs and MGS yield has widen.

MIDF Amanah Investment Bank Bhd (MIDF Research) in a note said its earlier expectations of higher volatility for MGS yield due to US interest rate hike had somewhat materialised as MGS yield spiked to 4.37 per cent in December following the hike in US Fed rate in December.

“Recall that we expect greater volatility in MGS yield in 2016 due to mixed views on the frequency of interest rate hikes by US Fed Reserve in 2016. Nevertheless, MGS yield has tapered off lately and has stabilised at 3.80 per cent level following the return of funds to Malaysia’s bond market,” it said in a report yesterday.

“In view of the stabilising MGS yield, we are revising our MGS yield assumption to four per cent from 4.45.”

MIDF Research expects the MGS yield to be less volatile going forward base on the latest Federal Open Market Committee (FOMC) statement by Federal Reserve which highlighted that the rate hike will be twice this year instead of four rounds as mentioned earlier in last December.

Lower MGS yield is positive to REITs as the spread between dividend yield of REITs and MGS yield has widen, it added.

“We increase the target prices for REITs under our coverage following the revision of MGS yield assumption which translates into lower discount rate in our Dividend Discount Model (DDM) valuation.

“We maintain our Neutral rating on REITs sector as outlook for retail and office segment of Malaysian property market remains unexciting.

“However, rental reversion for retail segment is expected to stay positive with a marginal increase due to the slow recovery in consumer sentiment. Outlook for office segment looks to remain challenging due to oversupply of office space which is expected to cause a compression in rental rates.

“Nevertheless, the decline MGS yield is positive for the REITs sector as it improves the appeal of REITs.”

Despite of the cautious consumer sentiment, MIDF Research is still expecting positive rental reversions for the likes of IGB REIT and CapitaLand Malaysia Mall Trust (CMMT).

“We expect the good location of MidValley Megamall to be supportive to IGB REIT’s rental reversion,” it added. “As for CMMT, we expect positive rental reversion from three malls — East Coast Mall, Gurney Plaza, The Mines and Tropicana — while the new full year rental contributions from Tropicana City asset is expected to more than sufficient to offset the negative rental reversion from Sungei Wang Plaza.

“Portfolio occupancy rate for IGB EIT and CMMT is still strong at 99.3 per cent and 96 per cent respectively. We also expect CMMT and IGB REIT to deliver decent dividend yields of 5.7 per cent and 5.2 per cent respectively which will be above peers’ average of 5.1 per cent.

“We are neutral on KLCC Property Stapled Group, Axis REIT, Pavilion REIT and Sunway REIT.”