Malaysian real estate investment trusts (MREITs) fundamental outlook remains sluggish with rental reversions either weak or limited given the oversupply of retail and office spaces, according to Kenanga Research.
“As such we maintain mildly negative to single-digit reversions for MREITs’ assets under our coverage, resulting in slightly positive distribution per unit (DPU) growth year-on-year of 3%-1% in fiscal year (FY) 2019 – FY2020,” it said in a research note.
The research house noted that strong reversions will remain challenging as tenants will prefer to prioritise occupancy over reversions but the saving grace for these segments are quality landmark assets and/or locations, which can weather oversupply conditions better by being able to attract higher footfall traffic.
The industrial assets segment has a better footing as its single-digit reversions are on par with other asset classes (i.e. retail and office), but lease terms are longer at circa six to 10 years (versus two to three years for retail and office) providing earnings stability over the longer term.
However, Kenanga Research believes that the sector still warrants a “neutral” call on the back of the uninspiring outlook for earnings and fundamentals, whilst commanding decent yields of 5.8% on average.
“We made no changes to our earnings forecasts for REITs but increase our target prices by 3% to 13%.”
It said the recent fourth quarter for 2018 (Q4FY18) results were mostly within expectations, save for Axis REIT’s (AXREIT) which was above and MRCB-Quill REIT’s (MQREIT) slightly below, while prior results seasons had consistently met expectations for five quarters in a row.
Kenanga Research’s top pick is Capitaland Malaysia Mall Trust (CMMT) given its above-average yields of 7.0%
Despite its share price declining 22% since 2018, the research house continues to see value in CMMT as the share price is currently trading at price-to-book value level of 0.86 times.