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Economy

Malaysia's recent rate cut renews appeal for REITs

KUALA LUMPUR (NewsRise) -- Malaysia-listed real estate investment trusts, also known as REITs, are witnessing a renewed interest following last week's surprise rate cut by the central bank as investors seek higher returns amid declining bond yields.

Several brokerages, including UOB Kay Hian and Hong Leong Investment Bank, raised the sector's outlook as potentially cheaper credit brightens prospects of higher consumption in an economy where domestic demand powers growth.

"We view this development as a positive surprise to the sector as it will lead to a wider spread," between REITs and Malaysian government bond yields, said UOB Kay Hian analyst Abdul Hadi Manaf, who lifted the sector's outlook to Overweight rating from Market Weight.

Typically REITs, which offer healthy dividends fueled by rental income, tend to gain from monetary easing due to their relatively stable and high yield nature compared to other assets such as bonds and short-term bills. Further, lower rates may help to boost earnings by reducing a REIT's interest expenses on borrowings.

Malaysia is home to 17 REITs that includes Pavilion REIT, a retail trust which owns the upmarket Pavilion shopping mall in downtown Kuala Lumpur, as well as KLCC Property largely controlled by the country's national oil and gas company Petronas.

Average yield of Malaysian REITs, which operates in a highly-regulated regime, stood at about 6.0%, according to analysts. The yield on the benchmark 10-year government bond fell 14 basis points to 3.52% on July 13 when Bank Negara Malaysia announced the rate cut. The drop was on top of a 21 basis points fall since the U.K. chose to cede from the European Union on June 23. In contrast, IGB REIT, the country's second-largest REIT by market value, gained as much as 8.7% on July 13 while retail-focused CapitaLand Malaysia Mall Trust rose as high as 3.9%.

Last week, the central bank lowered the overnight policy rate by 0.25 percentage point to 3.00%, the first change in two years, in a bid to stimulate the economy amid growing global uncertainties after the so-called shock Brexit decision.

"We think BNM's move to cut OPR bodes well for REITs' prospects as it is expected to boost consumer and corporates' spending power," said UOB's Abdul Hadi.

Malaysian consumers and businesses have been stung by higher prices following the introduction of consumption-based tax and slowing economic growth. Year-on-year, business loan growth decelerated in May at 4.5% compared to 6.2% in April while expansion of household lending slowed to 6.2% from 6.3% a month earlier, according to the central bank's most recent data.

In the first quarter, Malaysia's economy grew 4.2% year-on-year, its slowest pace since 2009, from 4.5% three months earlier. For the whole year, the third-largest Southeast Asian economy will likely expand between 4.0% and 4.5% this year from 5.0% growth in 2015, according to government forecast.

"Moving forward, we expect the potential downside for REIT from external factors to be limited with no immediate risk of narrowing yield spread given the monetary easing bias and relative attractiveness amid low yield environment and uncertainties in the global market," said Hong Leong's analyst Lee Meng Horng.

He upgraded the sector's rating to Overweight, noting "stability, attractive yield and sustainable interest among investors in the low global yield environment."

Units of Capitaland Malaysia rose 2.6% to 1.60 ringgit and Pavilion REIT climbed 5.7% to 1.87 ringgit on Tuesday. IGB REIT's price was down 0.6% at 1.66 ringgit while KLCC Property fell 0.5% at 7.51 ringgit. The benchmark FTSE Bursa Malaysia KLCI ended barely changed. The yield on the benchmark 10-year note ended at 3.57% on Tuesday.

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