KUALA LUMPUR (July 14): Hong Leong Investment Bank Bhd (HLIB) has downgraded the Malaysian real estate investment trust (M-REIT) sector to neutral from overweight as the Covid-19 pandemic impairs REIT earnings across most assets.

HLIB analyst Nazira Abdullah said that although historically, the widened yield spread between M-REITs and Malaysian Government Securities (MGS) bodes well for REITs' share prices, it may not be the case this time because the Covid-19-driven restricted movement policies in Malaysia have impaired the retail industry, which constitutes a large portion in M-REITs.

"We believe that the yield spread has widened drastically in recent times given the OPR (overnight policy rate) cut by Bank Negara Malaysia (BNM) and heightened risk aversion. 

"We expect REITs’ share prices to remain subdued amid the crisis, with exception of the more defensive ones (ie Axis REIT and MQREIT), which may gain some interest among investors during this crisis. As for our MAG10YR (10-year MGS) yield assumption, we leave it unchanged at 3.25% vs the current level of 2.64% (FY20 average: 3.02%).

"At the current level, the average yield for our stocks in coverage seems decent at 4.7%," she said.

"The outlook for office space remains lacklustre due to an unabated glut coupled with more incoming supply. As for retail REIT, near-term outlook has been impaired by Covid-19 and we expect slow recovery in their earnings due to weak consumer sentiment.

"Industrial REIT remains defensive amid the crisis and we believe there's strong growth potential driven by the surge of e-commerce activity," she said.

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