Malaysian real estate investment trust sector
Downgrade to neutral: After a lower foot traffic in February and early March 2020, retailers are hit with another major challenge — the government’s movement control order (MCO), resulting in non-essential services’ closure from March 18 to 31. While essential supplies and services — supermarkets, pharmacies, convenience stores, telecommunication services, food and beverage (F&B) for deliveries and takeaways — are allowed to remain open, we expect a lower retail spending at F&B and convenience stores during these trying times.
While mall owners and the Malaysia Shopping Malls Association had yet to announce their strategies for this difficult period, we believe the landlords will offer rental rebates on a case-by-case basis. Our earnings forecasts for all retail real estate investment trusts (REITs) under our coverage are cut, incorporating a minimal turnover rental and rental rebates of about 4% for 2020.
The hospitality industry, meanwhile, has been hit the hardest, firstly by lower international and domestic travellers, event cancellations in February and early March 2020 and now the MCO. In general, hotels are open with reduced services and chartered for existing customers only; hoteliers are not accepting new customers between March 18 and 31.
To mitigate a sharp revenue decline, hoteliers are undertaking strategies such as operational downsizing by closing several floors and manpower rightsizing such as non-renewal of contract workers and permanent staff taking forced leave. Broadly, we expect hospitality REITs to only achieve the minimum rental guaranteed under their master leases — YTL Hospitality REIT’s Malaysian operations and Sunway REIT; for those without master leases including KLCCP Stapled Group’s Mandarin Oriental, we expect an operating break-even for the hotels in 2020.
While we do not expect Covid-19 and the MCO to directly impact earnings of other asset owners — offices, warehouses and logistics, the ensuing weak economic growth, aggravated by a slump in global equity markets and prices of commodities, should affect their rental growth in 2020 to 2022.
In light of the challenging economic outlook, our rental growth rate forecasts for office, warehouse and logistics assets are cut. For leases expiring in 2020 and 2021, we expect rental to contract 2% to 5% from a growth of 0% to 2%. As a result, our Axis REIT’s earnings per unit (EPU) forecasts for financial year 2020 (FY20) to FY22 are cut by 3% to 6%.
Our Malaysian REITs’ EPU forecasts for FY20 to FY22 are cut by 3% to 14%, incorporating a lower retail rental for 2020 with rental rebates of 4% and a minimal turnover rental, a slower retail rental growth in 2021 and 2022 (we were earlier expecting a sharp rebound), Malaysian hotels to achieve only a minimum guaranteed rent or break-even, a rental contraction for offices and warehouse or logistics assets, a higher finance cost and a weaker Australian dollar against the ringgit for YTL Hospitality REIT. — Affin Hwang Capital, March 23