Upgrade to neutral: We believe that the short-term outlook for REITs will remain unexciting. The start of the tapering of the quantitative easing programme by the US Federal Reserve has resulted in a rise in the 10-year Malaysia government securities (MGS) bond yield to about 4.09% to 4.30% year-to-date (YTD) versus 3.43% to 3.54% in the same period last year.
As such, the net yield spread for larger REITs is still fluctuating at a relatively unattractive level of about 0 to 200 basis points. Nonetheless, the MGS bond yield seems to have normalised at the current level, thus limiting the risks of a further narrowing of yield spreads.
Among the REITs under our coverage, so far only Quill Capita Trust (target price [TP]: RM1.25) has announced a proposed asset acquisition. Axis REIT (TP: RM2.93) has also indicated that it is likely to acquire several assets in financial year 2014 ending Dec 31. Axis REIT is currently negotiating the acquisition of a few industrial assets in the Klang Valley, Penang and Johor valued at RM380 million in total. Although further acquisitions can help to boost earnings, we are cautious over the financing prospects for the upcoming acquisitions.
Axis REIT has completed its major asset enhancement initiatives (AEIs) on several assets and this is expected to yield double-digit returns on investments.
Hektar REIT’s (TP: RM1.46) refurbishment of its Central Square shopping mall will likely result in a doubling of its rental rates. Pavilion REIT (TP: RM1.45) will also be embarking on some AEI works to reconfigure some of its under-utilised retail space, and the works are expected to be completed by May 2014.
At this juncture, we believe that all negative factors like the fear of rising bond yields and rising expenses have already been priced in, thus limiting the sector’s downside risks.
Having said that, its upside potential will probably be limited, as concerns over the anticipated interest rate hike still remain. A potential catalyst could come from acquisition activities, which should be incremental to yields. Negatives priced in, upgrade to “neutral” from “underweight”. — RHB Research, April 3
This article first appeared in The Edge Financial Daily, on April 4, 2014.
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