OVERWEIGHTSREITs and UNDERWEIGHT MREITs.
• Short-term relief. As the US Federal Reserve (US Fed) maintains its QE or bond buying programme, the REITs sector will experience shortterm relief, as bond yields are expected to ease over the near-term.
After the US Fed first indicated its intention to stop its stimulus programme in May, both the Singapore REIT (SREIT) and Malaysia REIT (MREIT) markets saw some 15-20% correction in prices. This was due to the market’s anticipation that QE tapering would begin soon after, sparking off a capital outflow from emerging markets. As a result, SREITs’ yield spreads widened to 249 bps while that for MREITs rose to 109-175 bps, close to pre-QE levels. The current average dividend yields for both SREITs/MREITs (large caps excluding KLCC Property, or KLCCSS MK)- at 6.4%/4.3% (net) vs 4.2%/3.9% at peak valuations - are looking increasingly attractive. P/NAV is now 1.0x/1.2x for SREITs/MREITs vsthe previous high at 1.2x/1.5x.
• Still cautious over the medium term. Re-rating catalysts for the sector will come when bond yields start stabilising or stop rising and hinges on the timing of the US Fed official announcement on QE tapering. Note that, since May, the 10-year Malaysia and Singapore Government bond yields have increased by about 50 bps and 130 bps respectively. We expect this upward trend to continue after the short-term easing and, to be prudent, some 20-50 bps yield expansion is still likely, reverting to the long-term historical average level. During this period, with higher bond yields and subpar earnings growth, REITs will unlikely outperform the market significantly.
• Prefer SREITs over MREITs. On a relative basis, we prefer SREITs over MREITs due to the weaker economic fundamentals in the emerging markets. In July, rating agency Fitch downgraded Malaysia’s sovereign credit rating outlook to negative (from stable) due to deteriorating public finances. As the Malaysian Government has indicated plans to cut down some high import content infrastructure projects, this could potentially pose some downside risk to GDP growth. Furthermore, the recent fuel price hike and the likely announcement on GST implementation could dampen consumer sentiment in the near-term. Singapore, on the other
hand, appears to have more solid economic fundamentals. The Singapore Government has revised upwards its 2013 GDP growth forecast to 2.5-3.5% (from 1-3%), due to the stronger-than-expected 2Q13 GDP growth of 3.8% y-o-y (1Q13: 0.2%).
• Overweight SREITs, underweight MREITs. To be prudent, we like REITs with strong capital management, ie low gearing, good asset enhancement initiatives (AEI) and inorganic growth prospects, as well as capable managements. Despite the challenges, we still prefer Malaysia’s retail segment and Singapore’s office segment. Our Top Picks are: i) Keppel REIT, ii) Cambridge REIT, and iii) AIMS AMP Capital. These REITs offer better yields than the MREITs.
Publish date: 23/09/13