KUALA LUMPUR (Jan 10): Hong Leong Investment Bank Bhd upgraded the Malaysian real estate investment trust (REIT) sector to “Overweight” from “Neutral”, as yield plays for REITs are expected to remain in favour with another overnight policy rate (OPR) cut on the cards.

Hong Leong analyst Nazira Abdullah wrote in a note today that REITs have generally performed well under dovish expectations. Nazira said Hong Leong's REIT sector top picks are KLCCP Stapled Group (KLCC) and Sunway Real Estate Investment Trust (Sunway REIT).

She said factors including Visit Malaysia Year 2020 (VMY2020) are expected to bode well for these REITs' assets.

"We like  KLCC (BUY, TP: RM8.53) for its concentrated prime assets, Shariah compliant scarcity amongst REITs (only 4/18) and boost from VMY2020 (Suria KLCC and Mandarin Oriental).
 
"We also like Sunway REIT (BUY, TP: RM2.02), given its well-diversified portfolio in which the prominent assets are located at its unique township planning, coupled with income contribution from newly-acquired assets and positive outlook for their retail and hotel segments from VMY2020," she said.

At Bursa Malaysia today, Sunway REIT shares were traded unchanged at RM1.84 at 11:56am, for a market capitalisation of RM5.42 billion.

At 11:57am, shares of KLCC, comprising KLCC Property Holdings Bhd and KLCC REIT, fell one sen or 0.13% to RM7.96.

Hong Leong expects Bank Negara Malaysia (BNM) to cut the OPR by 25 basis points (bps) by the first half of 2020 (1H20), according to Nazira. On Nov 5, 2019, BNM said in a statement that its monetary policy committee decided to maintain the OPR at 3%.

Today, Nazira said: "While there are some optimistic signs of cooling (in) US-China trade tensions, we remain cautious and opine that downside risks will continue to persist. Consequently, our economics team expects BNM to cut OPR by 25bps by 1H20."

"Another OPR cut will bode well for share prices of REITs, given the inverse relationship. The defensive appeal of REITs (via dividends) should also stand out, given the uncertainties from external headwinds and risk aversion in the equity market. Furthermore, an easing interest rate environment will result in lower borrowing costs for REITs to acquire future assets to encourage more acquisition," she said.