REITs poised for a strong comeback, says AmInvest

By PRIYA VASU

REAL Estate Investment Trusts (REITs) are expected to be on a recovery path driven by rising consumer spending and footfall, following the relaxation of the Movement Control Order (MCO) and the upcoming Hari Raya Aidilfitri festive season in the second quarter (2Q) this year.

AmInvestment Bank Bhd (AmInvest) said the earnings visibility of REITs has been improving following the wide rollout of vaccines globally.

“While we are aware that before Malaysia achieves herd immunity (which is expected to be by the end of 2021), any further outbreaks of Covid-19 may still cause bumps to the recovery, we take comfort that the occupancy rate at the anchor malls of the retail REITs under our coverage remains healthy at above 95% (on average, only a slight decline of 1%-2% was recorded compared to pre-pandemic levels),”

The research outfit added that the pandemic has accelerated the consolidation of departmental stores and caused them to move out from lifestyle malls.

“We believe this could be a blessing in disguise as the malls are replacing the anchor tenants (which usually enjoy lower rental rates by taking up large lettable areas) with higher-average-rental-rate specialty stores,” it added.

The departmental stores that have shut down during the pandemic on AmInvest’s radar include Robinsons in Mid Valley Mall (in 4Q of financial year 2020 [FY20]) and Parkson in Da Men Mall (in 2QFY21), the second closure of a Parkson outlet since 2019 after the first moved out from Suria KLCC.

This trend is in line with the performance in the retail subsector as published in Retail Group Malaysia’s (RGM) Malaysia Retail Sales Report, wherein 2020, departmental stores-cum-supermarkets were one of the hardest-hit sector (with a decline of -20.2% recorded in sales), while specialty retailers were the least impacted subsector, recording the smallest decline in sales of 11.7% in 2020.

RGM is expecting a similar trend to persist moving forward. It is also forecasting the retail sales to grow by 4.1% for 2021, after declining by 13.4% in 1Q21 before it returns to its growth path from 2Q onwards. “This is largely in line with our assumption of rental recovery from 2Q onwards,
“We also take comfort that there
have been no major losses recorded for the commercial property assets owned by the REITs under our coverage,” said AmInvest.

Property consultancy Knight Frank said it is anticipating the values of the prime grade retail assets to remain relatively stable despite rental declines, supported by more resilient tenant and lease profiles, as well as the existing low-interest-rate environment, which will cushion the yields of the properties.

Knight Frank also highlighted that it is expecting some good quality prime assets to trade in 2021.

“It believes the prices of Malaysian hotels may be trading at 10% to 30% discounts compared to the pre- Covid values,” it added.

The research firm also does not rule out the chances of potential acquisitions to happen in the next 12 to 18 months for the REITs under our coverage, taking cue from their strong financial ability and debt headroom of 23%-42% debt-to-asset ratio versus 60% of the regulatory threshold (temporarily raised from 50% up to Dec 31, 2022, by the Securities Commission as a Covid-19 relief measure), which allows the REITs to gear up for further acquisitions.

“We view this as a good opportunity for the REITs to acquire yield-accretive assets to drive its medium-to long-term growth despite the short-term earnings pressures,” said the firm.