Thursday, November 28, 2013

DBKL assessment rate hike could affect M-REITs (CIMB)

REIT - DBKL assessment rate hike could affect M-REITs

Although the hike in DBKL assessment rates will have a negative impact on the REITs' net property income, we believe that most of it will be passed on to their tenants. The rate hike will have a bigger impact on the REITs with high exposure to Kuala Lumpur properties. We retain our Neutral stance on the REIT sector. Apart from the hike in assessment rates, we believe that the risk of higher interest rates in 2014 and thus, the narrowing yield spreads, will dampen the investor appetite for M-REITs. For exposure to Malaysian property, we advise investors to buy Mah Sing, which is currently our top pick for the property sector.


We retain our Neutral stance on the REIT sector. Apart from the hike in assessment rates, we believe that the risk of higher interest rates in 2014 and thus, the narrowing yield spreads, will dampen the investor appetite for M-REITs. For exposure to Malaysian property, we advise investors to buy Mah Sing, which is currently our top pick for the property sector.

What Happened
The Edge Weekly published an article at the weekend stating that the bottomlines of M-REITs with properties in Kuala Lumpur could be negatively affected by the proposed assessment hike by the Kuala Lumpur City Hall (DBKL). There were recent news reports that DBKL intends to raise the annual value of properties (on which the assessment rate is based) by 100-300%. The article stated that the current residential property tax is 6% of the annual value and the property tax is 12%. A hike in the assessment rates will increase the the M-REITs' operating expenses. In FY12, the M-REITs paid 1-4% of their net property income (NPI) in quit rent and assessment cost.

What We Think
Although a steep 100-300% hike in assessment rates will have a negative impact on the bottomlines of M-REITs, we believe that most of it will passed on to their tenants. In fact there is a common clause in most tenancy agreements stating that any utility or assessment cost increase can be transferred to the tenant. Thus, the assessment rate increase will not have a significant impact on the earnings and dividends of the M-REITs. However, it does mean that the operating environment will become more challenging for the REITs, given the other extra costs that the tenants have to absorb such as the GST and the possibly higher electricity rates.

What You Should Do
The hike in assessment rates will have the biggest negative impact on the REITs with the highest exposure to Kuala Lumpur properties, namely Pavillion REIT, IGB REIT and KLCC Property. We think that investors should not accumulate REITs due to the risk of rising interest rates, which would dampen sentiment on the sector.



Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 25/11/13

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