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REITs Still a Good Defensive Play Against Market Volatility

The recent flare-up over trade between the US and China threw financial markets into turmoil again, but Bursa Malaysia's real estate investment trusts (REITs) are still considered by market watchers to be a safe defensive bet.

"REITs are indeed good to add to a defensive strategy portfolio," said MIDF Head of Research Mohd Redza Abdul Rahman. "Looking at the REIT index, it has gone up nicely from Dec 31, 2018 closing at 924.87 points to 995.19 points on May 24 for a 7.6% return."

In response to questions from The Edge Financial Daily, Redza added that the sectoral index has made stable movements over the past few months despite the overall market decline.

Year-to-date (YTD), the Bursa Malaysia REIT index has been among the more stable indices, especially compared to the FBM KLCI's 5.46% decline since the start of 2019.

Even when compared to the construction and energy indices, which are up 24.11% and 18.72% YTD respectively, REITs have continued to shine. While both construction and energy indices hit their YTD peak in late April and have since declined some 12.5% and 12.1% respectively, the REIT index has held steady at over 995 points since hitting its YTD peak of 1,004.07 on May 8.

However, another investment bank-backed analyst said whether or not REITs will remain attractive depends on the movement of bond yields.

"It's too soon to say. We'll have to look at where bond yields are headed from the US Federal Open Market Committee's [decisions]," said the analyst, who declined to be named.

Last Wednesday, the minutes of the latest US Federal Reserve meeting suggested that it would follow a "patient approach" to interest rate changes "would likely remain appropriate for some time."

When Bank Negara Malaysia slashed its overnight policy rate by 25 basis points in early May, REITs were expected to benefit from the lower interest rate as it would have provided a better spread between their yields and the returns on Malaysian Government Securities. It would also have supported lower financing costs for the property managers.

"With the rate cut, we can expect better private domestic spending especially with the coming festive season, which bodes well for REITs with exposure to shopping malls and logistics hubs," MIDF's Redza said.

Corporate earnings will also be a key factor to watch when it comes to judging the valuations of Malaysian REITs. To MIDF, financial results for the first quarter of 2019 so far have been decent in meeting expectations.

"Earnings are expected to be stable for the sector, thus providing window opportunities whenever negative overall market sentiment puts pressure on their price movements," said Redza.

So far, most REITs which have reported their earnings for the first quarter of 2019 recorded a year-on-year (y-o-y) decline in profitability.

For instance, UOA REIT recorded a decrease in first-quarter gross rental income to RM19.55 million from RM19.6 million a year ago.

Net rental income for the commercial asset manager also declined as it recorded higher property operating expenses, although total expenditure declined 9% y-o-y due to lower borrowing costs.

UOA REIT announced a higher distribution per unit of 2.21 sen for the first quarter from 2.03 sen a year ago.

Meanwhile, Hektar REIT reported a fall in distribution per unit to 1.93 sen from 2.30 sen in the first quarter, as net property income declined 4.37% to RM18.58 million from RM19.42 million y-o-y.

"Property operating expenses increased by 1.6%," the shopping mall operator said in its stock exchange filing.

Another mall and commercial properties manager MRCB-Quill REIT posted a lower gross revenue of RM41.4 million, down some 6% y-o-y on the back of lower contributions from Platinum Sentral, Wisma Technip and Quill Building 5 - IBM.

"The results were below both our and consensus' expectations. The deviation was due to lower-than-expected interest income," said Hong Leong Investment Bank in its May 10 report.

Amanahraya REIT, meanwhile, announced a distribution per unit of 1.5 sen in the first quarter versus 1.35 sen a year ago as net property income also inched up 5.06% to RM20.1 million. This had been supported by contributions from Vista Tower, the group said in a stock exchange filing.

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