This article first appeared in The Edge Malaysia Weekly, on April 11 - 17, 2016.

Investors are showing interest in real estate investment trusts (REITs) again, judging by the recent increase in their market capitalisation. In just over six months since Sept 30, 2015, the aggregate market cap of Malaysian REITs has expanded 11% to RM26.75 billion.

A noticeable uptick occurred in the first quarter ended March 31, 2016, when the market cap of local REITs rose 7.4% to RM26.57 billion.

Analysts and fund managers say interest is returning to REITs as investors shop for yields in the midst of market uncertainty.

“Investors are shopping for yield investments but they are not buying blindly … Looking at the current data, it seems like they are looking for REITs with established track records,” says an analyst.

Among Malaysian REITs, investors seem to be picking up IGB REIT, Pavilion REIT and Sunway REIT.

The distributable income of Malaysian REITs held up pretty well last year with the average for the 16 listed on Bursa Malaysia rising 4% year on year to RM1.46 billion. A number of the REITs are trading at yields of 5% to 6.3%.

Analysts opine that the growing interest could also be due to foreign funds returning to Malaysian shores last year. “Foreign funds are flowing back … and REITs are popular among foreign investors shopping for yield investments. The recent strengthening of the ringgit has also improved the attractiveness of Malaysian equities,” says an analyst who covers REITs at a foreign research house.

Foreign funds have turned net buyers on Bursa Malaysia. According to MIDF Equities Research, the amount of net foreign purchases has exceeded RM1 billion for the fourth consecutive week. Last month, cumulative net foreign purchases amounted to RM6.1 billion, the local research house notes in an April 4 report.

Meanwhile, analysts are upping their respective target prices for REITs. MIDF Research in a March 29 report points out that the decline in the yields of Malaysian government securities has made REITs more attractive. It notes that MGS yield has tapered off lately, stabilising at the 3.8% level, following the return of funds to Malaysia’s bond market.

“We expect MGS yields to be less volatile based on the latest Federal Open Market Committee statement by the US Federal Reserve, which highlighted that rate hikes will happen twice this year instead of four rounds as mentioned earlier in December,” the research house says. “Lower MGS yields are positive for REITs as the spread between the former and the latter’s dividend yield has widened.”

Not surprisingly, MIDF Research has raised the target prices of the REITs under its coverage: Axis REIT, +1.8% to RM1.71; CapitaLand Mall Malaysia Trust (CMMT), +1.8% to RM1.69; IGB REIT, +1.9% to RM1.63; KLCCP Stapled Group, +2.3% to RM7.10; Pavilion REIT, +2.5% to RM1.67; and Sunway REIT, +2.5% to RM1.62.

“We maintain our ‘neutral’ rating on the REIT sector as the outlook for the retail and office segment of the Malaysian property market remains unexciting. However, rental reversion for the retail segment is expected to stay positive with a marginal increase due to the slow recovery in consumer sentiment. The outlook for the office segment remains challenging due to the oversupply of space, which is expected to cause a compression in rental rates,” says the research house.

“Nevertheless, the decline in MGS yields is positive for the REIT sector as it improves the latter’s appeal,” it adds.

Kenanga Research too recently upgraded the target prices of most of the REITs under its coverage.

“All in, we maintain all our calls with target prices upgraded by 3.2% to 8.7%. We maintain our ‘outperform’ call on Pavilion REIT (new TP: RM1.83; old TP: RM1.68) for asset stability and future asset acquisition potential, and Sunway REIT (new TP: RM1.65; old TP: RM1.60) for contribution from Sunway Putra Palace and a visible acquisition pipeline,” the research house says in an April 5 note.

“We have a ‘market perform’ call on Axis REIT (raising its target price to RM1.60 from RM1.55), KLCC (to RM7.42 from RM7.13) and IGB REIT (to RM1.53 from RM1.42). We have an ‘underperform’ call on CMMT (to RM1.35 from RM1.31), given the lack of fresh catalysts and negative sentiment on Sungei Wang Plaza,” it adds.

IGB REIT’s price remained unaffected by a gas explosion at one of its properties — Mid Valley Megamall. Analysts do not expect the incident to have any adverse effects on the REIT’s performance. In fact, for the longer term, they expect the mall to remain one of the favourite shopping destinations in the Klang Valley. 

IGB closed at RM1.53 last Wednesday, down three sen from RM1.56 before the explosion.

Meanwhile, retail REIT managers believe fears of weak consumer sentiment affecting the earnings of retailers are overblown.

“Considering the expectations of negative consumer sentiment continuing to be a drag on retail earnings, we didn’t see a big drop in consumer spending. We mustn’t forget that 1Q2015 saw a one-off spending push before GST kicked in that April. Taking the higher base last year into account, the numbers in 1Q2016 don’t represent the big drop everyone was bracing for,” says an executive director of a listed REIT with retail assets.

Will the second quarter of the year be the acid test for retailers?

A senior executive of another REIT with retail assets believes it will. “The second quarter of the calendar year is traditionally the weakest for retailers. This quarter will show whether or not consumers will tighten their belts further. The first quarter of this year wasn’t as bad as we had expected. Moving forward, what is more worrying is the supply coming onstream ... we think it will cause an oversupply.”

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