PETALING JAYA: In a market roiled by uncertainty, real estate investment trusts (REITs) have emerged as a saviour for investors.
For instance, the KL REIT index registered a 0.2% gain when the markets were hit by the collapse of Silicon Valley Bank (SVB) on March 8 and Credit Suisse Group AG the following week.
In the same period when the KL REIT saw a gain, albeit marginally, the FBMKLCI posted a 1.5% loss.
In an analysis this week, MIDF Research attributed the better performance of REITs against the market to its defensiveness, helping it to provide stable yield.
The KL REIT Index recorded a gain of 2.3% year-to-date (ytd) against the FBMKLCI’s loss of 6% ytd.
“We see that investors could be seeking shelter in REITs amid market uncertainty as the overall outlook for REITs Malaysia remains positive. They are unfazed by the turmoil in overseas markets,” MIDF said.
MIDF has given its top pick IGB REIT a target price (TP) of RM1.86 given its strong earnings growth of 68% in FY22 thanks to a recovery in rental and car park incomes.
Also on its “ buy” list is Sunway REIT for which it has a TP of RM1.73. The Sunway REIT saw earnings jump 82% to RM336.6 million in FY22 from the previous year, supported by the recovery of the retail and hotel divisions.
Interest rates a REITs Achilles heel
However, in an indirect way, increases in interest rates could have a negative impact on investor sentiment on REITs.
Yields from the 10-year Malaysian government securities (MGS) rise with increases in interest rates.
The more recent hikes in the overnight policy rate (OPR) by the US Federal Reserve and Bank Negara Malaysia (BNM) have led to a 4.5% rise in MGS yields.
Any increase in MGS yields will make it a better investment option than REITs.
Over and above that, an increase in interest rates also raises acquisition costs of new assets, making it more expensive if REITs are used to finance those expansions through borrowings.
Nonetheless, the pause in OPR hike at 2.75% has led to a tapering down of MGS yields to 4% in March.
Breakdown by sector
Going forward, MIDF said, the performance of REITs is likely to improve with a recovery in rental income and lower assistance to tenants.
This is particularly so for REITs with malls in good locations such as IGB REIT, Sunway REIT, Pavilion REIT and KLCCP Stapled Group.
Furthermore, MIDF expects retail spending to be supported by the festive season in 2Q23 and higher tourist arrival.
The research house also maintained that the industrial segments would remain defensive.
“Earnings performance of industrial REITs was encouraging, relatively unaffected by the Covid-19 pandemic as demand for industrial space remained strong,” MIDF said.
MIDF sees Axis REIT as a frontrunner in this segment. Axis REIT is expected to report stable earnings as industrial space remain solid.
REITs in the warehousing segment are also expected to stay strong. MIDF noted that despite the reopening of physical malls, online shopping remains strong, thus helping to maintain the demand for warehousing.
MIDF said that in the hotel segment, there already is light at the end of the tunnel, thanks to a recovery in domestic tourism and higher tourist arrivals.
“We expect tourism to see a turnaround in FY23 from the heavy losses incurred in FY20 and FY21 as a result of the closure of borders to curb the spread of Covid-19,” it said.
An expected significant increase in tourist arrivals from China will help the hotel industry recover.
Notable REITs with exposure to the hotel industry such as Sunway REIT and KLCCP Stapled Group are expected to see better earnings from the segment, MIDF added.