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This article first appeared in The Edge Financial Daily, on April 11, 2016.

 

Malaysian real estate investment trust (M-REIT) sector
Maintain overweight:
We currently maintain “overweight” on the sector and continue to prefer retail M-REITs (Pavilion REIT and IGB REIT) over non-retail or diversified M-REITs. We believe that investor appetite will remain strong for these stocks due to their low-risk factor (stable occupancy and rental rates), coupled with macro reasons such as the country’s resilient consumption spending, the improving ringgit outlook and low global interest rates that continue to underpin interest in M-REITs. This is reflected by IGB REIT’s and Pavilion REIT’s wider yield compression against Malaysian government securities yields. Retail M-REITs continue to benefit as their retail mall assets have close proximity to major offices and access to major roads, transportation lines and ample parking spaces, and are in the heart of prime shopping commercial areas, while serving a radius of huge population with higher income levels. These factors have enabled super-regional malls such as Suria KLCC, Pavilion Kuala Lumpur and Mid Valley Megamall to dictate the rental rate direction of tenants. There will be an estimated 16 million sq ft of net lettable area from the retail market, while 11.7 million sq ft will be from the office market coming into the Klang Valley from 2016 to 2021.

In the office market, negative impact will largely be on older office stocks in Kuala Lumpur (40% of the stocks at 15 to 20 years old), as we expect a migration of tenants to newly completed offices. On the retail front, the bulk of the incoming and planned supply (12.5 million sq ft) in the Klang Valley is mostly concentrated in suburban Kuala Lumpur and Selangor (from 2016 to beyond 2018). Hence, the impact on prime city centre malls is minimal. IGB REIT will be sustained by its stable occupancy rates of about 100%, being a key suburban super-regional shopping destination. Its 2016 estimate (2016E) to 2018E distribution per unit (DPU) yields are at 6% to 6.5%. Pavilion REIT remains a key shopping destination in the prime areas of Kuala Lumpur and captures a huge market of higher-income visitors. We expect yield accretion of its recent acquisitions to gradually improve in the longer term. Its 2016E to 2018E DPU yields are at 5.6% to 6.4%. — Affin Hwang Capital, April 8

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