Today's Pick (14/09/12/163/856) REITs seen to have more upside

REITs seen to have more upside

RETAIL REAL ESTATE INVESTMENT TRUSTS (REITs)
By HwangDBS Vickers Research

WHILE larger retail Malaysian REITs (MREITs) have outperformed KLCI and trade at comparable yields to Singapore REITs (SREITs), we see further upside with two more REITs launching in the second half of this year and beyond at new benchmark yields.
We estimate there is another RM12bil worth of prime malls owned privately or by developers which have REIT potential.
Retail MREITs have stronger growth potential than SREITs given rental reversion of 5% to 8% versus 3% to 4% per annum and more visible acquisition pipeline.
There is strong gravitation towards REITs for its more diversified resilient retail exposure, higher yields (140-240 basis points over fixed deposit rate) and inflation-hedging.

The expanded new Sunway Pyramid. HwangDBS Vickers has upgraded its financial year 2014 earnings forecasts on Sunway REIT and CapitaMalls Malaysia Trust by 9% and 8% on assumed injection of sponsor-owned-assets.

Retail sales in Malaysia have been expanding at a strong 8-year compounded annual growth rate (CAGR) of 19%, largely driven by local consumption.
Despite slower GDP growth and tightening in household debts, private consumption has proven to be resilient and should benefit from positive demographics, rising affluence, increasing tourist spending and government initiatives.
Rentals are on the rise along with tenants' improved capacity to absorb higher costs, influx of foreign brands and gradual shift to speciality stores.
This would also spur additional revenue growth given turnover rent comprises around 3% to 5% of total revenues on retail REITs (small base).
The next major rental revision for key prime malls will be in 2013 to 2014, and should continue to see a healthy uptrend (10% to 15% over a typical 3-year lease).
Shopping complex occupancy rates increased to 85% despite new mall openings.
Unlike SREITs, MREITs have yet to dabble into alternative financing which could mitigate the 50% gearing cap - providing headroom for more asset acquisitions.
While more expensive than conventional debt, this alleviates the need for unwelcomed cash-calls (eg rights issues) amid an uncertain macro-economic backdrop. We expect interest rates to remain low in the short-medium term around 3.5%.
We have upgraded our financial year 2014 earnings forecasts on Sunway REIT and CapitaMalls Malaysia Trust (CMMT) by 9% and 8% on assumed injection of sponsor-owned-assets.  

Date: 14 September 2012

Source: The Star 

Today's Pick (14/09/12/163/856)