Vaccination progress to lead recovery in REIT sector, says AmInvestment Bank

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 the growth in Malaysia's post-pandemic economy," the research house said, maintaining an “overweight” recommendation on the sector amid the nation’s vaccination roll-out.

In a sector report today, AmInvestment Bank believes retail REITS will largely be on a recovery path moving into the second half of 2021 as the economy reopens in stages, fuelled by pent-up demand once movement restrictions are lifted.

“We assume the country’s economy is to 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 footfalls will fully recover by year-end or even exceed historical peaks as people are more likely to travel domestically while waiting for clarity on new regulations for international cross-border travel,” it said.

It added that earnings visibility and associated risks of REITs are now much better compared with last year due to the widening rollout of vaccines both locally and globally.

AmInvestment Bank noted that its view for investors to collect quality assets is supported by:

1. better quality tenants, which are more likely to survive the economic downturn caused by the pandemic and thus support occupancy rates of the malls;
2. the 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
3. targeting markets mainly focused on consumers with better spending power and are more resilient during an economic downturn (thus supporting the recovery of footfalls and sales at the malls post-lockdown).

“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 that the average occupancy rates at the anchor malls of retail REITs under its coverage remain 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 the 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 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 of RM1.81 for its diversified investment portfolio, which includes retail malls, hotels and offices as well as a university and hospital and a large pipeline of potential assets for future injection.

Key risks include slower than expected footfall recovery, 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,Sunway REIT units were unchanged at RM1.38, bringing a market capitalisation of RM4.76 billion.

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