M-REITs still favoured despite expected lower rents

MALAYSIAN real estate investment trusts (M-REITs) have long been a favourite of risk-averse investors, given the asset class’ stable returns and promise of healthy dividend payments. However, the coronavirus pandemic has raised concerns about the resilience of rental payments, which are vital to the net property income performance of M-REITs.

With businesses struggling to cope in the aftermath of the pandemic, their ability to make good on rental payments and service potentially higher rates once their leases are up for renewal is in question, and this has translated into an uncertain operating environment for M-REITs.

The Bursa Malaysia REIT index, which tracks the performance of the 18 listed M-REITs, has underperformed the FBM KLCI, declining 7.67% year to date (YTD) to 888.96 points last Wednesday, compared with the FBM KLCI’s YTD decline of just 5.4% to 1,502.63 points.

Analysts and fund managers are still sanguine about the performance of M-REITs, but qualify that this would depend on the type of properties making up the portfolios.

TA Investment Management chief investment officer Choo Swee Kee says the REITs expected to be negatively impacted by Covid-19 are those in the retail and hospitality sectors, while industrial REITs will be the least affected.

“Hence, we favour industrial REITs. [For retail REITs], however, you have to take a longer-term view because when weaker tenants leave, the mall owners will replace them with other tenants that are [able to service] the rental payments,” he tells The Edge.

Pankaj C Kumar, a former director of investment at KSK Group Bhd, says the acid test for REITs will come when rental agreements are up for renewal.