REITs an attractive investment asset class

REITs have appeared increasingly on investors’ radar, especially after BNM’s OPR cut a few weeks ago


REAL estate investment trusts (REITs) have always been viewed by investors as a defensive investments and are particularly in demand in times of economic uncertainty, given their good sustainable dividend yields.

Pheim Asset Management Sdn Bhd CEO and CIO Leong Hoe Kit said as concerns rise over the adverse economic effects that may arise from the coronavirus outbreak, REITs have become a very attractive asset class.

“REITs have appeared increasingly on investors’ radar, especially after the 25-basis-point cut in the Overnight Policy Rate (OPR) by Bank Negara Malaysia (BNM) a few weeks ago. With expectations of further rate cuts in 2020, the outlook seems rather sanguine for REITs,” he told The Malaysian Reserve.

This is in stark contrast to earlier times when the US Federal Reserve was signalling possible increases in interest rates, causing prices of local listed REITs to fall, especially in the early part of 2018, as investors fled from holding REITs, he added.

REITs currently yield about 6.5% per annum and this industry’s average yield is quite respectable given the Employees Provident Fund’s (EPF) 2018 dividend payout was only 6.15% and 5.9% for the conventional savings scheme and the Shariah-compliant savings scheme respectively.

The EPF has yet to announce the dividend payout for 2019, but the expectation is that the rate will be lower than the 2018 rate.

Permodalan Nasional Bhd announced an income distribution of only 5.5% for Amanah Saham Bumiputera in 2019.

“Even if we factor in a discount of 20% from the latest yield numbers for REITs, it would still be much more attractive than fixed deposit yields, which would come down even more if there are further rate cuts by BNM,” Leong said.

A REIT is a company that owns and often operates real estate like commercial, industrial or hospitality properties to earn an income. There are some 18 listed REITs on Bursa Malaysia at present and many more abroad.

Due to the dividend yields, local REITs are popular with institutional investors.

In the current highly volatile market environment, many stocks have been sold down and attracted value investors who will focus on fundamentally sound companies to add to their investment portfolio.

“In line with the often-repeated advice to never put all your eggs in one basket, investors should also include REITs in their investment portfolio to effectively diversify their holdings,” Leong said.

REITs may be much less exciting than beaten-down tech stocks now, but these low beta investment alternatives would provide the steady dividend yields and lower the risk profile of one’s investment portfolio, he added.

As there are calls by retailers urging mall and shop landlords to provide 30%-50% rebates for six months to help cushion their businesses from the economic effects of the coronavirus outbreak, Leong advised investors to be selective in choosing the REITs to invest in.

His main pick in the space is Axis-REIT Managers Bhd as it is focused mainly on industrial and warehousing assets, and not retail mall-based REITs which may be impacted by the demand for rebates from its tenants and weaker consumption patterns.