REITs yield in for compression

From Business Times

13th July 2013

MALAYSIA'S in-vogue REITs sector might come under pressure after a top research firm warned a compression in yields will affect margins.

"Higher yield will make new acquisitions tougher and new debt funding will be more expensive as banks are expected to raise lending rates," the research firm warned.

Yesterday, RHB Research advised investors to reduce their exposure to local REITs (real estate investment trusts) and downgraded the sector to "underweight" from "neutral".

On the equity side, the investing public were slow to warm up to REITs, but the trend has changed since then, and investing in REITs is seen as a sound and stable form of investment.

Such acceptance has helped push bigger companies to sell shares of their REITs to the public.

In recent years, companies have even bundled up commercial properties into REITs, such as the Pavilion REIT which included the swanky Pavilion shopping centre.

Ironically, Malaysia was among the first to develop the REITs market in Asia.

In 1989, Amanah Harta Tanah PNB made its debut on Bursa Malaysia as the first listed property trust in Malaysia and 15 years later Axis REIT became the first REITs' listing on Bursa Malaysia.

"We adjusted our valuations for all the M-REITs under our coverage by raising the discount rate by 50 basis points (bps) to 80 bps in order to reflect the higher yield environment," it said.

RHB Research opined that the attraction of M-REITs was eroded by the rising bond yield environment, which narrowed the spread for M-REITs.

The narrowing spread has a lot to do with Bank Negara Malaysia's (BNM) move to tighten consumer lending and curb property purchases.

According to BNM, Malaysians borrowed more than RM350 billion for residential property purchases, of which nearly RM132 billion were for personal finances.

Malaysia's top bank Malayan Banking Bhd's research arm said the household debt is not yet a "systemic risk".

The country's household debt-to-GDP (gross domestic product) ratio of 81 per cent last year is second only to South Korea's 91 per cent in Asia.

The ratio is lower than that of developed economies, which averaged about 90 per cent.

Meanwhile, RHB in justifying its downgrade on the REITs sector, used Singapore REITs (S-REITs) as a base to strengthen its view point.

It explained that property trusts in the city state had experienced a selldown last month, with the FST REIT falling by 15 per cent from its recent high in mid-May 2013.

Based on the current yield of 2.51 per cent, the spread for S-REITs had contracted to 239 bps compared with 365 bps in the first quarter of the year.

[Source]