REIT sector primed for economic recovery

This is as the country’s economy reopens in stages


THE real estate investment trust (REIT) sector is positioned to be on a recovery path into the second half of this year as Malaysian economy reopens in stages driven by an accelerated vaccination programme.

AmInvestment Bank Bhd (AmInvest) said the current lacklustre performance in retail REITs’ share prices offers an opportunity for investors to quality retail REITs assets, whose property values have remained largely intact despite the Covid-19 pandemic.

The investment bank said opportunities for quality assets are supported by better quality tenants, a stronger market position that allows malls to enjoy a premium in chargeable rental rates and the ability to target markets mainly focused on consumers with better spending power and are more resilient during an economic downturn.

“We assume the country’s economy is to reopen largely by the end of the year (which we believe is an opportune time to capture the year-end holiday season when people are most likely to spend).

“This is in line with our assumptions that domestic footfalls will fully recover by year-end or even exceed historical peaks as people are more likely to travel domestically while waiting for clarity on new regulations for international cross-border travel,” AmInvestment stated in a sectoral report yesterday.

The investment bank added that retail sales recovery would also be fuelled by pent-up consumer demand after the lockdowns, similar to what has happened in the past as consumers tend to revenge spend and gather once movement restrictions are lifted.

Based on the previous occasions when lockdowns were lifted, malls under its coverage observed higher average sales per footfall. “We believe earnings visibility and associated risks of REITs now are much better as compared to last year, thanks to the widening rollout of vaccines both locally and globally,” the investment bank noted.

For the retail REITs under its coverage, AmInvestment observed the average occupancy rates at anchor malls remain healthy at above 90% despite a slight decline compared to pre-pandemic levels due to termination of tenancy contracts.

It added, the vacant space was quickly replaced by new tenants, although the transition period took slightly longer than usual as delayed renovation works were due to the various movement restrictions in place.

AmInvest expects REITs under its coverage to maintain a comfortable debt-to-asset ratio of 22% to 42% versus the regulatory threshold of 60%, which was temporarily raised from 50% until Dec 31, 2022, by the Securities Commission Malaysia as a Covid-19 relief measure.

“We do not rule out potential acquisitions to materialise over the next 12 to 18 months for the REITs under our coverage with the emergence of yield-accretive assets, which could further drive inorganic growth over the medium-to long-term despite the short-term earnings headwinds,” it said.

AmInvest has maintained an ‘Overweight’ recommendation for the REIT sector. Based on estimates, the REITs under its coverage provide distribution yields of over 5% for the financial year 2022 compared to the current low interest rate environment.

“We like the sector as a recovery play as it is poised to benefit from the growth in Malaysia’s post-pandemic economy,” it noted.

The investment bank, however, said it might downgrade the sector to ‘Neutral’ if footfall recovery is slower than expected, or if there is a massive decline in occupancy rates due to increased competition from the retail spaces oversupply.

It might also lower its expectations if consumer spending or sentiments deteriorate further or recovers slower than expected.

AmInvestment’s top pick for the sector is Sunway REIT, with a fair value RM1.81, for its diversified investment portfolio, including retail malls, hotels and offices, a university, hospital and a large pipeline of potential assets for future injection.

Sunway REIT shares ended 0.72% higher to RM1.39 yesterday, valuing the company RM4.76 billion.