REAL ESTATE INVESTMENT TRUSTS (REITs) are probably back on many investors’ radar screens as risk appetite drops amidst cautious sentiments following the sharp correction in stock markets worldwide in the past three months.

Risk-averse investors would have taken refuge in defensive stocks and REITs could be an alternative, especially when an interest rate hike is unlikely in the next six months, if not longer.

The lure of REITs lies in their high dividend yield of an average 5% to 6% at present. “REITs tend to be resilient but they can also be less defensive than certain stocks because of their sensitivity to interest rate hikes. Looking at the current situation, where there might not be a rate hike, REITs have gathered investor interest,” says Yvonne Tan, Eastspring Investment’s chief investment officer of equities.

By comparison, the yield of the usual dividend stocks is lower, for example 5.25% for Guinness Anchor Bhd, 4.82% for British American Tobacco (M) Bhd, 4.18% for DiGi.Com Bhd and 3.4% for Nestlé (M) Bhd as at Jan 9.

That said, all REITs are not made equal. For now, experts opine that retail REITs are a better bet than the other classes. In a recent report, RHB Research highlights that for retail REITs, the average annual rental rate growth stands at 5% to 7% while for industrial REITs, it is 2% to 3%. For office REITs, the growth is expected to be flattish.

Still, there are concerns about malls mushrooming in the city centre and the suburbs. Analysts say the malls in the pipeline are expected to draw the crowds away from the existing ones, which would lead to a decline in footfall and possibly the non-renewal of leases.

But Eastspring’s Tan believes this should not be a worry, at least not this year, as the underlying assets of most retail REITs have been doing well. Still, she cautions investors to be mindful of the increase in retail space going forward. “The second-tier malls are already beginning to feel the effects of the increase in supply. They have not been doing well.”

RHB Research, however, does not expect the damage from possible cannibalisation by the incoming supply of retail space to be extensive. “This is because the malls under the REITs are typically mature and well established,” it says.

According to Kenanga Research, the percentage of the retail REIT leases expiring in the financial year 2015 under its coverage is not big. For example, between 13% and 16% of the leases of Pavilion REIT, Sunway REIT and IGB REIT are expiring in FY2015. None of KLCC REIT’s leases is expiring in FY2015 while CapitaMalls Malaysia Trust will see the highest percentage of expiry at almost 30%. In a recent statement, Hektar REIT says tenancy involving some 42% of its net lettable area is expiring in FY2015 ending Dec 31.

There is apprehension that weak consumer sentiment and the implementation of the Goods and Services Tax will see shoppers tighten the purse strings, which in turn will hit the performance of retail REITs. However, analysts opine that this will largely depend on the proportion of turnover rent to base rent.

“We believe REITs, such as IGB REIT — whose turnover rent is in the mid-teens while that of the others is 3% to 7% — may see a dip in gross rental income if tenants’ sales take a beating,” says Kenanga Research.

While retail REITs may look attractive now, Interpac Securities head of research Pong Teng Siew says investors should look at REITs with a specific purpose, such as healthcare.

“In good times and bad, people still need healthcare,” concurs a market observer.

There is only one pure healthcare REIT in Malaysia — Al-’Aqar Healthcare REIT — which has several KPJ specialist hospitals, two KPJ nursing colleges, a commercial block, two hospitals in Indonesia and one retirement home in Australia in its portfolio.

For the third quarter ended Sept 30, 2014, the REIT recorded a gross rental income of RM27.23 million compared with RM26.8 million a year ago. Its earnings per unit (EPU) was 2.12 sen compared with 2.09 sen previously. The REIT also announced an interim distribution of RM26.87 million, equivalent to a distribution per unit (DPU) of 3.86 sen.

Sunway REIT has some exposure to healthcare via the Sunway Medical Centre, which only contributes 4.4% to revenue. Much of the REIT’s revenue — 71.3% — comes from its retail segment.

In its first quarter ended Sept 30, 2014, total revenue stood at RM113.81 million, up 13% from a year ago. EPU was 2.17 sen compared with 1.9 sen a year ago. The REIT’s distribution per unit was 2.28 sen for the quarter.

In the meantime, investors seem to be shying away from office REITs, citing the glut in office space. According to Kenanga Research, Axis REIT, which has much exposure to office space, saw occupancy drop to 90.5% in the cumulative nine months ended Sept 30, 2014, from 92% in 1H2014 ended June 30. Rental reversions were also soft at 1.9% — far below Axis REIT’s norm of 8% to 9%.

So, although some types of REITs will perform better than the rest, the question is, can they sustain their yields? Interpac Securities’ Pong opines that REITs have become less defensive than a year or two ago while Eastspring’s Tan says, “The only way for REITs to sustain their yields is if their prices go down or if they generate more income.”

This article first appeared in The Edge Malaysia Weekly, on January 12 - 18 , 2015.

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