KUALA LUMPUR (July 26): The current lacklustre performance of retail real estate investment trusts’ (REITs) share prices offers investors a good opportunity to invest in quality retail REIT assets whose property values have remained largely intact despite the Covid-19 pandemic, AmInvestment Bank said.
"We like the sector as a recovery play as it is poised to benefit from growth of Malaysia's post-pandemic economy," the research house said, maintaining its “overweight” recommendation on the sector amid the nation’s vaccination roll-out.
In a sector report today, AmInvestment Bank said it believes retail REITs will largely be on a recovery path moving into the second half of 2021 (2H21) as the economy reopens in stages, fuelled by pent-up demand once movement restrictions are lifted.
“We assume the country’s economy will reopen largely by the end of the year, which we believe is an opportune time to capture the year-end holiday season when people are most likely to spend.
“This is in line with our assumptions that domestic footfall will fully recover by year end or even exceed historical peaks as people are more likely to travel domestically while waiting for clarity of new regulations for international cross-border travel,” it said.
It added that earnings visibility and associated risks of REITs are now much better compared to last year due to the widening roll-out of vaccines both locally and globally.
AmInvestment Bank noted that its view for investors to collect quality assets is supported by:
- better quality tenants, which are more likely to survive the economic downturn caused by the pandemic and thus support occupancy rates of malls;
- a stronger market position that allows malls to enjoy a premium in chargeable rental rates as they act as the primary gateway for new international brands to enter the Malaysian market; and
- targeting markets mainly focused on consumers with better spending power and are more resilient during an economic downturn (thus supporting the recovery in footfall and post-lockdown sales at malls).
“Looking beyond 2021, we believe the recovery in international tourist traffic will further boost retail REITs’ earnings prospects,” the research house added.
AmInvestment Bank also said it takes comfort in the fact that the average occupancy rate of anchor malls of retail REITs under its coverage remained healthy at above 90% despite a slight decline observed as compared to pre-pandemic levels due to termination of tenancy contracts. However, this was quickly replaced by new tenants despite delayed renovation works due to the various movement restrictions.
In terms of financial health, AmInvestment Bank said REITs under its coverage continue to maintain a comfortable debt-to-asset ratio of 22% to 42% versus the regulatory threshold of 60% (which was temporarily raised from 50% until Dec 31, 2022 by the Securities Commission Malaysia [SC] as a Covid-19 relief measure), allowing REITs to gear up for further acquisitions.
“We do not rule out potential acquisitions to materialise over the next 12 months to 18 months for the REITs under our coverage with the emergence of yield-accretive assets, which could further drive inorganic growth over the medium to long term despite the short-term earnings headwinds,” it added.
AmInvestment Bank’s top pick for the sector is Sunway REIT, with a fair value (FV) of RM1.81 for its diversified investment portfolio, which includes retail malls, hotels and offices as well as a university and a hospital and a large pipeline of potential assets for future injections.
Key risks, meanwhile, include a slower-than-expected footfall recovery, a massive decline in occupancy due to retail space oversupply and poor consumer spending. “[In which case,] we may downgrade our stance to 'neutral',” the research house said.
At 10.36am today, Sunway REIT units were unchanged at RM1.38, bringing it a market capitalisation of RM4.76 billion.