Monday, October 14, 2013

Real estate investment trusts remain quiet on asset acquisition front

Posted on October 11, 2013, Friday

KUCHING: With Malaysian real estate investment trusts (M-REITs) remaining quiet on the asset acquisition front, this implies fewer exciting prospects as strong growth, and hence, share price performance hinges on new acquisitions.

According to researchers at Kenanga Investment Bank Bhd (Kenanga Research), retail M-REITs organic growth may also be under threat due to higher acquisition and purchase (A&P) cost caused by stiff competition.

This will limit tenants’ ability to keep up with higher rental rates, while the supply glut for office spaces in the Klang Valley may suppress organic growth, it added.

“Until September 2013, our M-REITs universe has yet to see any asset acquisition, with the exception of Sunway REIT which announced the completion of its acquisition of Sunway Medical Centre in the first quarter of current year 2013 (1QCY13),” Kenanga Research said.

The research arm believes this is highly due to the low cap rate environment of five per cent to six per cent (versus seven per cent to eight per cent previously) which is a mismatch between M-REITs asset net property income (NPI) yields.

Axis REIT has yet to announce the acquisition of an estimated RM400 million worth of assets under negotiation this year while CapitaMalls Malaysia Trust (CMMT) is reviewing the acquisition of Tropicana Mall and office Tower worth RM550 to 650 million (CMMT has obtained approvals for a potential placement).

As for Sunway REIT, it has been eyeing acquisitions from parent and third parties of up to RM7 billion over the next three to four years, but nothing is firmed up as yet. In contrast, market talk of the REIT-ing of Suria KLCC or any potential assets by KLCC Stapled Group has been quiet, suggesting fewer exciting growth prospects as M-REITs will only be able to grow organically.

In terms of retail organic growth, the research arm believes there maybe weaknesses with future organic growth rates for retail M-REITs (6 per cent-9 per cent per annum) such as CMMT and Sunway REIT.

Retailers are facing stiff competition, which has resulted in higher A&P costs and limit their ability to keep-up with rising rents brought about by the series of ‘REIT-ing’ over the last few years.

“ We will be monitoring the situation closely as we have yet to factor this impact into our earnings,” Kenanga Research reiterated.

With Budget 2014 soon approaching this October 25, the research’s House Strategist anticipates the announcement of GST implementation by mid-2014 to early 2015.

Should the goods and services tax (GST) be implemented, the biggest impact of GST will be on tenants, thus limiting strong rental reversions for M-REITs in the future.

This may also nibble into our future earnings estimates post implementation as tenants operating costs are expected to increase,” it added.

Kenanga Research believes the effects of GST will be less detrimental on office/industrial REITs, such as Axis REIT, as their tenants are locked in for longer lease periods, and have lower step up rates compared to heavier retail REITs such as Sunway REIT and CMMT, providing office/industrial REITs with more earnings resilience.

As such, Kenanga Research downgraded its M-REITs sector call to ‘underweight’ from ‘neutral’ by virtue of its ‘underperform’ call on KLCC Property Holdings Bhd and Sunway REIT as it provides a limited total return of -0.2 per cent and 0.6 per cent.


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