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This article first appeared in The Edge Financial Daily on September 3, 2019

KUALA LUMPUR: Malaysia’s two biggest banks, Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd, said last week they expect Bank Negara Malaysia to cut the overnight policy rate (OPR) by another 25 basis points (bps) by year end, reflecting rising expectations of one. Just four months ago, the central bank shaved off 25bps from the OPR to 3%, the first cut since 2016, amid low inflation and concerns about slowing growth.

Such forecasts are stoking interests in dividend stocks, including real estate investment trusts (REITs).

While UOB Kay Hian Malaysia research head Vincent Khoo does not expect another OPR reduction in the second half of this year, he said REITs — which he termed “the prime beneficiaries in the current prolonged low interest rate environment” — will be further rerated upwards if another cut materialises. “The current volatile equity market makes retail REITs particularly attractive for their stable income and high dividend (distribution) yield. We expect high investor interest in REITs yielding more than 5%, which well exceed alternative fixed income investments such as fixed deposit rates,” he told The Edge Financial Daily in an email exchange.

“To a modest extent, the low interest rate environment helps spur economic growth and consumption which benefit retail REITs. In addition, REITs that have high floating rate debt profile will benefit more from lower interest burden,” he added.

Notably, Bursa Malaysia’s REIT Index has grown 9.89% year to date, while the FBM KLCI has shrunk 4.64% over the same period.

In a recent note, Affin Hwang Capital senior analyst Isaac Chow shared that six of the REITs under the research house’s coverage have outperformed the KLCI in four of the past five years. “Moving into 2H19 (second half of 2019), the REITs’ defensive earnings, stellar yields and a low correlation to benchmark indices make them a good investment proposition during economic uncertainties ahead,” he said.

UOB’s Khoo prefers retail REITs over office REITs. More specifically, he likes those with prime and niche malls that are strategically located as opposed to mass retail markets. Unlike the mass retail market, Khoo said prime retail malls have managed to achieve decent rental reversions due to their strategic locations and good product offerings.

“Retail REITs feature relatively stable supply-demand dynamics versus office REITs, where a multi-year supply glut will pressure the average office occupancy and rental rates. The average rental rates for KL (Kuala Lumpur) office space have been staying flat. In addition, retail REITs’ income can enjoy some upside from consumer spending via ‘turnover rental’ (sharing of retail revenue),” he said.

AmInvestment Bank Research analyst Thong Pak Leng said outlook for retail properties, especially malls, will remain stable in the short to medium term. He cited Pavilion REIT and Sunway REIT as prime examples, with both enjoying high occupancy rates. “We believe the high occupancy rates are also due to strong management and brand names of the REITs, in addition to shopping complexes becoming one-stop centres for the Malaysian lifestyle, providing F&B (food and beverages) and entertainment options,” he said in a July note.

Thong also thinks demand for industrial properties will be stable, driven by the logistics and warehousing segments, largely supported by the emergence of e-commerce. “The preference for logistic warehouses will likely continue to be within the Klang Valley, largely in Shah Alam, where there is a large concentration of manufacturing activities and distribution centres,” he noted. But the analyst remained “neutral” on REITs, given their high valuations now, and advised investors to buy on weakness.

Stock-picking is vital under the current economic situation, Affin Hwang’s Chow stressed, where oversupply of properties, weak consumer sentiment, and slowing growth could affect occupancy rates, rental reversions and hence, REITs’ earnings and distributions.

“We recommend that investors stick to the big-cap Malaysian REITs with prime properties, long-term rental agreements and proven earnings records. We would put a higher emphasis on earnings sustainability than yields,” he said.

Among these, analysts’ top picks are Pavilion REIT, IGB REIT and Axis REIT. Year-to-date, Pavilion REIT has grown by 14%, IGB REIT by 19.7% and Axis REIT by 21.1%.

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