PETALING JAYA: Despite the current global inflationary environment, RHB Research is turning more positive on the real estate investment trust (REIT) sector as a defensive play due to its “guaranteed” rental income.
However, RHB Research maintained its “neutral” rating on the sector, noting that it is “not there yet” and encourages investors to pick those with quality assets as it remains a tenant’s market.
The research house named Axis Real Estate Investment Trust (Axis-REIT) and IGB REIT as its top picks for the sector.
“We like Axis-REIT as it is a key player in the booming industrial segment, benefitting from the rise in eCommerce,” RHB Research said in its latest report.
Meanwhile, the research house likes IGB REIT for its prime assets, domestic shopper profile and a relatively high turnover rent portion, which will benefit from an increase in retail sales.
“We think inflationary pressures will be the key risk, moving forward, as customers’ purchasing power will be affected but the RM10,000 Employees Provident Fund (EPF) withdrawal should help to boost spending up until the third quarter of this year (3Q22),” it added.
With market’s expectation of further overnight policy rate (OPR) hikes until 2023, the yield spread will likely remain at unattractive levels, according to the research house.
Currently, yields for Malaysian REIT (MREIT) stocks covered by the research house average at about 4.4%.
“The increasing bond yield from the expected rate hikes has led to the yield spread between MREITs and bond yields to compress to an all-time low of about 12 basis points (bps).
“This is following the 72bps increase in the bond yield year-to-date and shrinking MREITs’ dividend yields following the recent share price movement for MREITs,” it added.
The research house, however, expects a marginal change of up to 1.8% in earnings for a hike of 25bps to the OPR, as higher finance costs will lead to earnings being compressed marginally.
“The MREITs under our coverage with the highest proportion of floating rate loans are Pavilion REIT and Sunway REIT, whereas IGB REIT’s loans are almost all on fixed terms,” it noted.
Despite the research house turning more positive on the outlook for REITs, its “neutral” call was in line with the structural overhang and near-term macroeconomic headwinds.
It expects rental reversion to remain in the low-single digit range, given the influx of retail space coming into the market this year.
Despite the narrowing yield spread, RHB Research believes the stable dividend yield and the estimated double-digit earnings growth for financial year 2022 (FY22), due to the low base in FY21, are good reasons for investors that are looking for a flight to safety.
FAQs
By investing in one of Malaysia's premier REITs, such as Sunway REIT, your capital gains immediate diversification across an array of property types and geographical locations. Your investment spans a range of assets, including shopping malls, hotels, and office spaces across various states in Malaysia.
Are REITs a defensive investment? ›
Yes - some REITs can be defensive while others are not. This is because there are many different types of REITs.
What is the 90% rule for REITs? ›
How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Is there a downside to investing in REITs? ›
Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.
How is the performance of REIT in Malaysia? ›
Year to date, the KL REIT Index has gained 2.8% to 794.64 points. Over a one-year horizon, roughly since interest rates started to climb, it has declined just 1.61%. On the other hand, the KL Financial Services Index has declined 6.97% over the past year and 5.47% year to date (YTD).
What is the average return on REITs in Malaysia? ›
Nonetheless, the total return gross dividend from M-REITs delivered a positive performance of 5.86% on the back of an expansion in distribution yield since our call in 2022, outperforming the domestic bourse FBMKLCI's loss of -8.42%.
Do REITs outperform the S&P 500? ›
Over the long term, our research found that REITs have outperformed stocks. Since 1994, three REIT subgroups stood out for their ability to beat the S&P 500. Here's a closer look at these market-beating REIT types.
Are REITs cyclical or defensive? ›
Apartment real estate investment trusts (REITs) are also deemed defensive, as people always need shelter.
Can a REIT go out of business? ›
What this means is that REITs are ideal borrowers for banks. They are exactly who they want to do business with because they know that the risk of a REIT bankruptcy is extremely low. Just look at the past. There have been very few REIT bankruptcies over the past 50+ years.
How long should I hold a REIT? ›
Is Five Years the Standard "Hold" Time for a Real Estate Investment? Real estate investment trusts (REITS) and other commercial property investment companies frequently target properties with a five-year outlook potential.
For Group REITs, the consequences of leaving early apply when the principal company of the group gives notice for the group as a whole to leave the regime within ten years of joining or where an exiting company has been a member of the Group REIT for less than ten years.
How much of my retirement should be in REITs? ›
“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
Do REITs go down in a recession? ›
REITs historically perform well during and after recessions | Pensions & Investments.
What happens to REITs when interest rates go down? ›
REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.
Are REITs safer than stocks? ›
REITs have outperformed stocks on 20-to-50-year horizons. Most REITs are less volatile than the S&P 500, with some only half as volatile as the market at large. Several individual REITs delivered significantly higher returns than the S&P 500.
Which is the best REITs in Malaysia? ›
Note: We've excluded brokerage costs, currency exchange gains/losses and taxes that might be applicable to foreign investors.
- Axis REIT (CAGR: +10.74%)
- Sunway REIT (CAGR: +8.54%) ...
- Pavilion REIT (CAGR: +7.39%) ...
- IGB REIT (CAGR: +7.02%) ...
- Atrium REIT (CAGR: +6.12%) ...
| Name | Weight in Index |
|---|
| 1 | KLCC Property Stapled | 32.5% |
| 2 | IGB REIT | 16.1% |
| 3 | Sunway REIT | 12.8% |
| 4 | Pavilion REIT | 11.0% |
7 more rowsJun 12, 2021
If a (Real Estate Investment Trusts) fund distributed at least 90 percent of their total yearly income to unit holders, the REIT itself is exempted from tax for that year of assessment. However, unit holders are liable to tax on the distribution of income.
Which REIT has the highest dividend yield in Malaysia? ›
Malaysian REIT Data – LIVE Daily Updates 🇲🇾
| Name | Price | Distribution Yield |
|---|
| KIP REIT | 0.90 | 6.89% |
| KLCC Property Holdings | 7.50 | 5.40% |
| Pavilion REIT | 1.29 | 6.98% |
| Sentral REIT | 0.80 | 8.40% |
17 more rows