Looking forward, the research arm expects mid-single-digit reversions for retail assets, flattish to low single-digit reversions for industrial assets, and flat to mildly negative reversions for office assets. — Bernama photo
KUCHING: After the Kuala Lumpur Real Estate Investment Trust (KLREIT) index recovery plunged to a low of minus 13 per cent in March, MREITs share prices have been recovering but Kenanga Investment Bank Bhd (Kenanga Research) reckons that the sector’s outlook is still unexciting as it continues to be plagued with unexciting reversions.
“We reckon that the sell-down in 2018 may have been due to perceptions of a growing oversupply of office and retail spaces in the Klang Valley, and expectations of negative impact from an OPR hike, which we believe are unsubstantiated.
“Meanwhile, the recent recovery may have been due to investors gaining some confidence post positive performance in recent quarters as 3Q17, 4Q18 and 1Q18 results have all met expectations, while investors may also be looking for flights for safety in MREITs in light of market volatility post GE14,” said the research arm.
However, that being said, the sector’s fundamentals continue to be unexciting due to low rental reversions.
The issues of oversupply have made string rental reversions tough to come by in the last three years with many MREITs under Kenanga Research’s coverage recording flattish to mild GDPU growth.
In particular CMMT has seen GDPU declining marginally due to weakness at Sungei Wang Plaza.
Looking forward, the research arm expects mid-single-digit reversions for retail assets, flattish to low single-digit reversions for industrial assets, and flat to mildly negative reversions for office assets.
In terms of occupancy however, Kenanga Research opines that most MREITs with landmark assets will not bear the brunt of the oversupply fears as they tend to fare better than the market with above-average occupancy and positive reversions due to well managed assets.
“We believe MREITs with contributions from landmark malls such as PAVREIT, IGBREIT, KLCC, and SUNREIT will continue to remain stable from higher footfall traffic.
“This enables such assets to retain close to maximum occupancy of 95 to 100 per cent versus the domestic retail occupancy of circa 80 per cent, and command positive reversions – albeit at a slower growth rate which we have accounted for,” said the research arm.
REITS with landmark office assets such as KLCC and MQREIT are also expected to fare better than the industry with occupancy averages of 96 to 100 per cent versus the Klang Valley average of circa 80 per cent.
Looking forward, Dewan Bandaraya Kuala Lumpur’s previous decision to freeze approvals for new applications of building shopping centers, offices, service apartments an luxury condominiums in the capital city will be a long-term positive as it will help address the oversupply situation.
All in, MIDF Research guides that they’re comfortable with their current valuations as the 10-year MGS target of 4.20 per cent is close to current levels and maintain their wide spreads of +1.4ppt to +3.3ppt which is +0.5SD above historical averages to serve as a buffer for near-term fluctuation to the MGS.
“We remain cautious of the MGS which has risen 8 per cent YTD, especially post GE14 and will continue to monitor Malaysia’s credit rating due to the slew of debt-related news post elections.
“At current levels, we believe MREITs are commanding decent yields of 5.0 to 7.1 per cent, but our valuations are conservative due to the uncertain macro fundamentals,” they said.
MIDF Research maintains their ‘Neutral’ rating on the sector with SunREIT as one of their top picks as the REIT’s yields are decent at circa 6 per cent and on par with MREITs average.