KUCHING: The spike in yields of the Malaysian Government Securities (MGS) was viewed as negative by analysts to real estate investment trusts (REITs) due to narrowing spread between dividend yield of REITs and MGS yield which reduce REITs’ attractiveness.
According to MIDF Amanah Investment Bank Bhd (MIDF Research) in a sector update, MGS yield spiked in November beyond the 4.45 per cent mark following the outflow of foreign funds from emerging markets.
“Currently, MGS yield is hovering at 4.35 per cent – above five years mean plus two standard deviations of 4.3 per cent,” it said in the sector outlook.
“The spike in MGS yield is negative to REITs due to narrowing spread between dividend yield of REITs and MGS yield which reduce attractiveness of REITs.”
The research arm said the spread between dividend yield of REITs and MGS yield sharply declined in November, making it the thinnest spread in the past five years.
This, MIDF Research revised upwards its MGS yield assumption by 25 basis points to four per cent from 3.75 per cent in view of high likelihood of Federal Reserve raising interest rate which would keep MGS yield volatile going forward. The research arm’s new MGS yield assumption of four per cent is close to a five-year mean plus one standard deviation of 4.1 per cent.
On the outlook for retail sector in Malaysia, it is expected to show marginal improvement in 2017 as the research arm saw that consumer sentiment should have bottomed out in 2015.
In this context, the research arm expected slightly better outlook for retail sales which should underpin rental reversion for retail segment to remain in positive territory.
“Meanwhile, we opine that office segment of Malaysia property market will continue to be tenants’ market due to the oversupply of office space which render limited upside to rental reversion,” it said. Overall, MIDF Research maintained its ‘neutral’ rating on REITs sector.