Safe haven in REITs

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According to UOB Kay Hian (UOBKH) Research, local REITs offer decent yields of at least 5%

PETALING JAYA: In times of market volatility, real estate investment trusts (REITs) are considered a safe haven investment.

According to UOB Kay Hian (UOBKH) Research, local REITs offer decent yields of at least 5%, while improving consumption trends with the reopening of the economy will see a higher number of people entering malls.

“Shopping mall footfall since December 2021 has improved to 80% to 90% of pre-pandemic levels. Tenants’ sales are also recovering at a faster pace than footfall, with strong demand for luxury brands,” the research firm said in a REIT sector outlook as part of its second-half 2022 market strategy report.

Explaining why it was “overweight” on REITs, UOBKH Research noted that the sector index had outperformed the FBM KLCI by 12.5% in the first half of 2022.

“In the short to medium term, REITs act as a defensive stronghold and should continue to outperform relative to the FBM KLCI, as market sentiment may turn bleak and defensive amid stagflation/recession concerns,” it said.

According to the research firm, Malaysian REITs still offered decent excess return potential over fixed income instruments.

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However, one factor which may dampen the sector’s prospects is the rising interest rate environment. They can make acquisition costs of new assets more expensive if REITs are financing their expansion by borrowings.

This could lower distributable income, which, in turn, may lead to smaller dividend payouts and yields.

Policy control: The Bank Negara building in Kuala Lumpur. Last week, it raised the overnight policy rate to 2.25%, which was the second interest rate hike this year. Analysts do not discount more hikes by year-end.

Despite this, UOBKH Research believes the impact from a rate hike “would be manageable as local REITs have healthy gearing levels”. Additionally, the potential earnings recovery could offset some of the negative impact.

Last week, Bank Negara raised the overnight policy rate (OPR) to 2.25%, which was the second interest rate hike this year. Analysts do not discount more OPR hikes by year-end.

The research firm believes the encouraging and improving quarterly results will keep the sector resilient, with earnings set to fully recover back to pre-pandemic levels in 2023.

“Office REITs offer higher stable yields, followed by retail REITs, which will be boosted by an earnings recovery, especially when international tourist arrivals go up,” it said.