Analysis Malaysian REITs downgraded, costlier financing seen
Business & Markets 2013
Written by Jeffrey Tan of theedgemalaysia.com
Tuesday, 13 August 2013 14:32
KUALA LUMPUR (August 13): The prospect of higher interest rates in Malaysia is expected to raise local real estate investment trusts' (REIT) finance cost.
This has prompted analysts to cut target prices (TP) for shares of property trusts here.
In a note today, HwangDBS Vickers Research Sdn Bhd analysts Chin Jin Han and Yee Mei Hui said the firm has cut TPs for names including Pavilion Real Estate Investment Trust, and KLCC Real Estate Investment Trust to RM1.60 and RM8.55 respectively.
Meanwhile, HwangDBS Vickers has also lowered its TP for CapitaMalls Malaysia Trust (CMMT) and Sunway Real Estate Investment Trust to RM1.95 and RM1.60 respectively.
At 12.30pm, Pavilion and KLCC rose one sen each to settle at RM1.38 and RM6.52 respectively. CMMT and Sunway were flat at RM1.55 and RM1.35 respectively.
"We feel a bigger issue would be the cost of financing future acquisitions and major enhancements. We conducted stress tests on our existing acquisition assumptions, particularly for big-ticket items such as Pavilion KL extension, Sunway and Monash University campuses, Putra Mall refurbishments, Queensbay Mall injections, and Suria KLCC acquisition.
"Based on this, a 30 bps (basis point) rate hike would increase finance costs by 1-3%, and a 50bps hike would see 2-5% higher interest expenses p.a," Chin and Yee said.
However, the analysts said that REITs should be shielded from rising interest rates as their debt-maturity profiles indicate little need for refinancing in the next one to three years, with over 70% in fixed-rate debt.
Bank Negara Malaysia's current overnight policy rate (OPR) stands at 3%. But anticipation that domestic inflation will increase on reduction in subsidies for crucial goods such as fuel, has prompted expectation that BNM will raise the OPR.
This comes amid slower world economic growth. Maybank Investment Bank Bhd wrote in a note last month that that the OPR is expected to increase to between 3% and 3.25% in 2014.
Meanwhile, HwangDBS Vickers said local REITs may offer opportunities for investors to accumulate the stocks' following a decline in prices.
The analysts said that rebounding yields, potential acquisitions and cautious economic outlook make a good time to accumulate REIT shares.
“REIT unit prices have dipped over 10% in the last two months on the back of rising government bond yields. This results in average distribution yields rebounding by 20-30bps to 6.1%, similar to yield spreads in April 2013 levels”, said the analysts.
HwangDBS Vickers' top picks in the sector are Pavilion and KLCC. The research firm said it prefers REITs with a more visible asset pipeline and high asset quality.
"We prefer REITs with potential for growth from sponsor-led asset pipelines, given unreasonable valuations on a majority of potential third-party acquisitions.
"Hence, we are more inclined towards REITs with more visible injection opportunities and prime assets, such as Pavilion REIT and KLCC Stapled Security," the analysts said.
Publish date: 13/08/13