KUCHING: The share price losses of 3 to 30 per cent year to date experienced by Malaysian Real Estate Investment Trusts (MREITs) are unwarranted, according to analyst Kenanga Investment Bank Bhd (Kenanga Research).
In a sector report, Kenanga Research said the losses in share prices seen in MREITs are most likely due to investor insecurity on the widening yield spread in light of a second overnight policy rate (OPR) hike and the oversupply of retail and office spaces.
“We believe the recent sell-down has veered into the irrational territory driven by investor’s fears as OPR hikes have minimal effect on MREIT’s earnings.
“This comes as most MREITs have over 70 per cent of their borrowings on fixed rates, save for Pavilion REIT, MRCB-Quill REIT (MQREIT) and Acis REIT who have less than 30 per cent of borrowings on fixed rates.
“And in any case, a 50bps hike to Pavilion REIT, MQREIT, and Axis REIT would only lower earnings by one to two per cent, which is minimal,” said the research arm.
Valuation-wise, the research arm believed that OPR hikes had little correlation with MGS rates which made it more elastic to other macro factors such as US interest rate hikes and dollar carry-trade stories.
“Notably, the 10-year MGS yields remain stable at 3.90 to 4.00 per cent post the first OPR hike in January this year, despite expectations of three US interest rate hikes in 2018.
“The 10-year MGS was also unfazed when the ringgit depreciated from RM3.30 to TM4.45 in 2014 to 2015, but MGS yields were declining during the same period on the back of high foreign holdings of 44 to 48 per cent.
“Even with all the volatility, the MGS maintained its high foreign holdings at 45 per cent currently.”
While Kenanga Research deemed the recent sell-down to be “irrational and unwarranted”, they would still be addressing investors’ concerns of another potential 25 bps OPR hike this year by assuming a temporary risk premium of an additional 50 bps for all MREITs under their coverage.
“Our in-house view is that the probability of a second rate hike is low, and hence we may look to lower this premium upon further certainty.”
In regards to the oversupply of office and retail spaces, Kenanga Research opined that MREITs with land mark assets would prevail in the long-term as they tend to have better-than-average occupancy of 90 to 100 per cent compared to the market average of 80 per cent.
Additionally, the office assets under Kenanga Research’s coverage were also boasting an above average occupancy of 95 to 100 per cent compared to the market average of 81 per cent.
With a stable MGS outlook and fundamentals intact for FY18 thanks to small portions of expiring leases and unexciting reversions, Kenanga Research pointed out that the recent share price sell-down have caused MREITs’ spread to spike, surpassing record highs while other MREITs under the research arm’s radar are close to historical spreads.
Currently, MREITs’ spreads are close to or have exceeded 5-year highs at 0.96 to 4.07 ppts.
All in, post adjustment of spreads and earnings, Kenanga Research maintained its ‘overweight’ rating on the sector with a across the board lowering of their covered MREIT’s target prices by six to 21 per cent.