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Monday, May 28, 2012

Renewed interest seen in M-REITs

PETALING JAYA: The continued volatility in the global stock markets is expected to generate renewed interest in local real estate investment trusts (M-REITs) in the medium term, Malaysian REIT Managers Association (MRMA) chairman Stewart LaBrooy said.

With stock markets expected to be in for a correction, he said the narrow trading bands of M-REITs would absolve them from the shocks in the global markets.

“In the current volatile global environment, we have been witnessing a flight of capital to dividend stocks with low beta, such as real estate investment trusts. As investors flee the equity markets, M-REITs have seen their stock prices rising to new highs with a number of them providing their unitholders with double-digit returns in 2011. We believe we should also see strong returns for 2012,” he told StarBiz.

Labrooy said the M-REIT market's liquidity and depth would improve with new REIT listings like the upcoming Mid Valley Megamall and Gardens REIT by IGB (IGB REIT).

He added that 2011 saw the market capitalisation of listed M-REITs rose to above RM15bil, adding much improved liquidity to the stocks.

“The listing of IGB REIT, expected in the second half of this year, could be even larger than the Pavilion REIT. The market is still waiting for details to emerge on the size of the listings although it has been estimated at around RM4bil,” he added.

Labrooy said there was still a high level of interest in M-REITs among institutional and retail investors, and the IGB REIT listing would be no exception.

“There is still an appetite for more listings in the future and it will definitely develop the M-REIT market into a much more liquid market which will in turn attract more foreign investors.”

He believes that yield compression has topped out and there could be some retracement back to slightly higher levels. “If M-REITs continue to acquire and accrete their funds, we will see a continuation of double-digit total returns in the years ahead.”

In a recent report on the M-REIT sector, RHB Research maintained a “neutral” rating on the sector.

It said the current valuations of M-REITs suggested that there was limited room for yield compression.

“We see limited upside for the key larger REITs Pavilion REIT, Sunway REIT and CapitaMalls Malaysia Trust. Some value is seen in Axis REIT (due to potential bumper dividend post asset disposal) and Al-Aqar Healthcare REIT, which despite its smaller size offers more reasonable yields,” it added.

The research house is also upbeat on the upcoming listing of IGB REIT, “given its not-so-bullish valuations at RM4.6bil, which translates into a rather decent average per sq ft (psf) price of RM1,815 psf.”

“We estimate that the listing yield will be around 5.8% to 6%,” it added.

Labrooy, who is also Axis REIT Managers Bhd chief executive officer, said many of the M-REITs were trading at a premium to their net asset value (NAV) making non-dilutive capital raising possible. This has resulted in many M-REITs returning to the market to raise fresh equity to expand their portfolios and provide their unitholders with higher dividends.

He said institutional investors especially the big pension funds and insurance funds were opting for M-REITs especially for their cash dividends.

However, he said that despite the substantial cash stashed away in fixed deposits and savings accounts that only generated yields of 1.2%-3.3%, interest from retail investors in REITs was just slowly coming around.

“Retail investors are still wary of the equity markets or if they are investors, they don't invest in REITs because they confuse them with unit trusts or the fact they don't behave like equities.”

To address this situation, he said the MRMA was initiating some programmes to educate retail investors on M-REITs.

On prevailing uncertainties in the market, Labrooy said things to watch out for this year included external shocks coming from economic and policy developments in the eurozone, rising China-US trade friction, China's slowing economy, escalation of social and political tension in the Middle East, and expectation of a snap election in Malaysia.

He said the main concern would be the unfolding eurozone crisis as banks there would have to boost their Tier-1 capital ratio by 9% by mid-2012, and this could lead to a liquidity crunch in the second half of the year.

“Meanwhile, with the ebbing of inflationary concerns, the positive news is that the region's monetary policy has now moved from inflationary containment to a focus on growth. This has led to policies that have seen the maintaining of record low interest rates that are providing additional liquidity into the banking system,” Labrooy said.

By The Star

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