by IFAST RESEARCH TEAM / pic by MUHD AMIN NAHARUL
WE ARE positive Malaysia’s GDP in 2022 would grow by 5.7%-6% supported by revitalising economic activities.
Private consumption saw a V-shaped recovery in the third quarter of 2021 due to revenge spending (where people tend to have a vengeful shopping spree after months cooped up in quarantine and limitations on spending) and we expect this phenomenon will occur following the easing of restrictions recently.
There was a massive drop in foreign tourist arrivals from an average 2.1 million tourists per month in 2019 to only an average 9,000 per month since the outbreak of the Covid-19 pandemic, denoting there is a huge potential to recover back to its pre-pandemic level.
Based on the recent positive economic data and Covid-19 developments, we believe Malaysia is now on track to full recovery and real estate investment trusts (REITs) would benefit along the way.
Retail REITs command the greatest weight in the Bursa REIT Index. Retail REITs, which mainly consist of shopping malls owners such as IGB REIT and Pavilion REIT, went through a rough time during the movement control order era in 2020 and 2021. Fortunately, the occupancy rate of the top five retail Malaysia REITs (M-REITs) seems manageable, with the occupancy rate remaining firm at 91% in 2020 and 90% in 2021, thanks to the rental assistance such as the PERMAI stimulus package and longer tenancy agreements.
Moving forward, we believe the retail M-REITs, especially the prime shopping malls, could record a better performance with no further concerns from the Omicron variant and higher footfall levels alongside the reopening of international borders.
Office REITs have been relatively stable during the pandemic era due to the long lease contracts. We believe most companies will adapt the post-pandemic hybrid working style in the near future to minimise the overcrowding in office spaces, and indirectly reduce the demand for certain office properties that are not located in prime locations.
Although the industry is still grappling with the oversupply issue, we believe the office REITs will still generate sustainable earnings from the demand for office space in prime locations and with good connectivity.
We think the office property five top M-REITs areas still attractive as most of their office property are located in strategic locations such as the Klang Valley and will continue to be resilient as evidenced by KLCC Property Holdings Bhd’s (KLCCP) and Axis REIT’s steady earnings throughout the pandemic.
Furthermore, employees would still need a physical workplace to perform their operation duties eventually.
Hospitality REITs such as Sunway REIT, which consists of hotels and resorts, suffered the most during the outbreak of the pandemic.
The average hospitality property occupancy rate of the top five M-REIT in FY20 and FY21 was registered at 48% and 31% respectively.
After two difficult years of being hit by the unprecedented Covid-19, we expect a gradual recovery in the second half of 2022 coupled with the holiday seasons and the pent-up demand from the long-awaited tourist arrivals.
Industrial REITs such as Axis REIT remain in a good position as strong demand, fuelled by e-commerce growth and changes in supply chain will likely keep rent growth robust for industrial REITs in 2022 as most of the industrial assets are in manufacturing and warehouse spaces.
M-REITs continue to demonstrate resilience despite the challenges posed by pandemic conditions and uncertainty during the market drawdown.
Among the top 5 M-REITs in terms of market cap, all of them registered compelling double-digit earnings growth estimates in 2022 on the back of favourable macroeconomic environment and previous year’s low base effect.
Moving forward, we think the lower rental assistance could largely reduce the operating costs while the higher private consumption could boost revenue stream of M-REITs which have relatively high weightage in Retail and Hospitality REITs, propelling the top and bottom line of M-REITs to a higher stage.
Bursa REIT Index looks attractive now trading at 15.6x forward P/E based on 2024 earnings.
Based on the forward P/E, M-REITs are hovering around -1 standard deviation, denoting the market is recovering and it is on the path back to the normal phase at this juncture.
Investors could enjoy a sustainable dividend yield of more than 5% per annum for the next few years alongside the potential capital gain by holding the assets.
We believe the favourable macroeconomic environment and previous year’s low base effect would be a strong growth catalyst for M-REITs.
Based on historical data, the five-year average P/E for M-REITs is 20x. However, we have factored in the extremely aggressive scenario in which Bank Negara Malaysia will increase higher than expected Overnight Policy Rate to our P/E valuation model.
As such, we opined a fair P/E of 18x (similar with the historical P/E during the last interest rate hike environment in 2018). That being said, we have assigned a higher target price to 831 points coupled with 15.5% upside potential by year-end 2024 owing to strong earnings growth from the current price at 719 points as of April 27, 2022.
Despite the inflation rate in Malaysia remaining low compared to developed markets, the uncertainty from supply chain disruption and post-Covid economic recovery could be a potential risk to trigger the aggressive-than-expected rate hike.
In this case, this might impose a risk to the REITs sector with higher than expected debt repayment and have a contracting effect on the economy.
Among REIT players, we think Retail REITs that own premium malls and Hospitality REITs will have decent upside potential in 2022.
Office REITs and Industrial REITs would stay resilient bolstered by stable rental revenue and high occupancy rates. In a nutshell, we are bullish on M-REITs to experience gradual growth aided by lower rental assistance and the reopening of international borders.
The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s owners and editorial board.