While the FBM KLCI dropped last Friday, the firm observed that the performance of REITs were comparatively resilient with minor losses than the benchmark index.
KUCHING: Real estate investment trusts (REITs) are perceived as a safe-haven for investments during times of uncertainty amid increased volatility in financial markets.
Analysts believed REITs listed on Bursa Malaysia offer investors an alternative investment and diversification during times of unfavourable financial markets movement especially following Brexit in which the UK voted to leave the European Union (EU).
The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) in a report yesterday said REITs have been benefiting from the flight to safety during market uncertainties arose by Brexit due to its characteristics of high defensiveness and low risk which implied lower sensitivity to global market movement.
While the FBM KLCI dropped last Friday, the firm observed that the performance of REITs were comparatively resilient with minor losses than the benchmark index.
“Malaysian REITs do not have exposure in Britain and European countries,” it said in a note yesterday.
“Besides, the stable Malaysian Government Securities (MGS) yield has kept the attractiveness of REITs intact whereby the positive spread between dividend yield of REITs and MGS yield were sustained.”
It noted the MGS yield was relatively stable, traded at 3.89 per cent despite the depreciating ringgit thereby indicating resilient demand for MGS as investors flocked to safe-haven assets.
Thus, MIDF Research maintained its forecast for MGS yield at four per cent as the research firm expects the MGS yield to be less volatile going forward as frequency of interest rates hike by US Federal Reserve might be lower than expected.
Concurring with MIDF Research, the research arm of Hong Leong Investment Bank Bhd (HLIB Research) also expects the yield for MGS to remain stable for 2016 due to the expectations of unchanged Overnight Policy Rate (OPR).
It explained that the stable yield could also be due to sovereign risk premium over the falling yield of bonds at developed country.
On another note, HLIB Research believed the strong buying interest in REITs in search for yield activity in the first half of 2016 (1H16) should normalise in 2H16 with the compression of average yield for REITs to 5.6 per cent from 6.2 per cent at the beginning of 2016.
In particular, it foresees improving prospect for retail REITs in Malaysia as consumers’ sentiment turned better from 1Q16 onwards.
HLIB Research noted that the Consumer Sentiment Index in 1Q16 rebounded to 72.9 from all-time low of 63.8 in 4Q15, indicating potential recovery in consumer spending due to better sentiment.
“The underlying fundamental of the REITs sector remained unchanged since with potential slower organic growth caused by slower rental reversion by major mall operators in tandem with subdued store sales growth in general.
“Apart from that, potential huge office space supply in the pipeline and slower business expansion are not likely to improve in the near term, thereby causing downward pressure on rental yield for REIT.
“Hence, we believe the upside potential of REIT could potentially be offset by a more cautious outlook within the sector itself with continued uncertainty in the global economic growth (for instance Brexit), negative interest rate environment, China economic slowdown and the US presidential election.”
The research firm continued to believe that growth for the REIT sector could be driven by inorganic growth as acquisition opportunity might emerge given the softer asking price for property in the sluggish market.
As a whole, analysts reiterated their ‘neutral’ rating on the REITs sector with a favourable outlook.