On 5 May 2020, Bank Negara Malaysia cut its key interest rate to 2%; a decrease of 0.5%. Generally, Real Estate Investment Trusts (“REITs”) are relatively more attractive when key interest rates are cut. This is because the borrowing costs of REITs are reduced leading to an increased in net property income and distributable income.
However, is it really attractive for investors to look into REITs right now? Year-to-date, the overall Malaysia REITs Index is down by 11.1%.
The said index has been freefalling on 19 March 2020 by 20.8% from 976.9 to 773.6 points. Since then, it has recovered 12.3% to 868.36 points as at 22 May 2020. The main reason for the significant drop was due to covid-19 outbreak and the political unrest in Malaysia.
Given this significant drop, many investors would think that now is the time to look into REITs. I took a deeper look into it and here’s my take on Malaysia REITs:
#1: There are 12 Malaysia REITs Trading at Below NAV
REITs are attractive when its share price trades below its Net Asset Value (“NAV”) and its Distribution Yield (“DY”) is at historical high. However, you can never get this kind of situation. There is always a “catch” for REITs trading at such attractive valuation.
In Malaysia, there are a total of 18 REITs at the time of writing this article. As at 22 May 2020, there are 12 REITs trading below its NAV and their DY ranges between 6.33% to 11.10%. Most of these REITs have already been facing troubles way before the Covid-19 outbreak. For example, office-focused REITs have been facing oversupply of office spaces in Klang Valley since 2015.
The current pandemic situation is just making these already troubled REITs worst. Many have reduced its rental to help their tenants especially for retail & hospitality REITs.
Given the existing issues and the current pandemic effect, these REITs are expected to declare lower distribution per unit (“DPU”) moving forward. This will likely decrease its DY which currently seems to be inflated.
On the surface, these 12 REITs looks like a bargain but in actual fact they are not. This explains a lot on the danger for investors to chase of high distribution yield without knowing the real reason behind it.
#2: There are 6 Malaysia REITs Trading at Above NAV
What about the other 6 REITs in Malaysia? Well, all of them are trading above their NAV. These REITs’ DY ranges between 4.65% to 6.11% at the time of writing. Again, there is always a reason why these REITs are trading at premium.
All these REITs past performances have been good with increasing net property income and DPU. This has made investors more confident in investing into it and perceived them to be worth more than its current valuation.
Despite the recent Covid-19 outbreak and its likely negative impact towards these REITs, investors viewed it as temporary. Accordingly, you will see that many of these REITs prices still hold or increase regardless of its recent quarterly result announced.
For example, KLCC have recently announced its quarterly result with a decrease of 3.8% in its profit. This decrease was mainly attributable to its wider losses in hotel operation. However, the full effect of the rental reduction has yet to be reflected in its quarterly report.
When the result announced on 5 May 2020, KLCC was trading at RM7.83 per share and it maintains at this level as well the next day after the quarterly result. This speaks volume on the investors’ optimism towards KLCC. This brings me to my next question, are investors being too optimistic about these REITs? I think they are.
For the past 5 years, these 6 REITs have been trading at average DY of between 4.8% to 5.95%. This is without taking into account of the 10% withholding tax. I believe this figure will be lower if includes the 10% withholding tax.
It seems overvalued when comparing the current DY against their past 5 years average DY. Looking at all 6 REITs, the lowest DY is Axis REIT which is at 4.65% at the time of writing this post. At this rate, it would be much better to contribute more voluntarily into your EPF account which generate an average 22 year dividend rate of 5.7%.
Coming back to my main question, are Malaysia REITs attractive to invest now? My simple answer is NO! But that’s my opinion. Simply because the current DY might be inflated by past DPU declared.
For example, Sunway REIT recently have announced that the DPU for financial year 2020 is likely to be lower than previous year. Assuming the DPU for year 2020 is reduced to only RM0.085 per share, this would give a DY of 4.87% after taking into account of 10% withholding tax.
Of course, the above is mainly due to the negative impact of covid-19. When analyzing REITs, we should take a longer-term view by assuming there are no Covid-19 outbreak. Even if there is, DPU will eventually go back its normal level.
For Sunway REIT, its average 5 years DPU stood at RM0.0925. This gives a DY of 5.3% after taking into account of 10% withholding tax. In my opinion, it is currently at fair value based on this DY.
Overall, it seems like REITs in Malaysia are not that attractive as prices have recovered most of its losses since 19 March 2020 – the start of the global pandemic.
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