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Wednesday, August 6, 2014

Malaysia REITs - Yields Will Remain Despite OPR Hike !


The yields from REIT will remain at current levels (Aug 2014) even if the overnight policy rate is increased again by end 2014.
 
Industry observers do not expect a significant shift of interest from REITs to other fixed income investments such as government bonds as bond yields are unlikely to move in tandem with an OPR hike given the sustained foreign interest in them.

People perceive that when the OPR goes up the bond yield would go up as well. But interestingly, when BNM increased the OPR to 3.25% in July 2014 the bond yield of MGS actually went down to 3.88%.

Compared the situation with that what happened in 2009 when BNM trimmed the OPR by 75 basis points to 2.5% to boost economic growth. The MGS bond yield went up after that and in 2010 when the BNM increased the OPR again, the MGS bond yield dropped.

The borrowings of most M-REITs also lean towards fixed rate loans. So if BNM were to raise the OPR by another 25 basis points, earnings for these REITs would not be significantly affected.

QUILL Capita and Pavilion REIT and IGB REIT would be the least affected as close to 100% of their debts are at fixed rates.

Investors are advice, apart from looking at valuations should also study the property segments and the asset quality the REIT carries as that will determine earnings prospects.

Earlier 2014, there was a sudden surge in the yield of the 10 year MGS bond as the QE easing in Europe tapered off causing a selldown of all local REITs.

But it has since stabilized and started trending down since Feb 2014 despite the OPR hike in July 2014. It could be due to strong foreign as well as domestic demand.

Going forward, the M-REIT sector lacks strong re rating catalysts.

Most of the M-REITs are averaging 6%.

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