Rising interest rates will weaken consumer spending and hurt REIT sector, says AmInvestment

KUALA LUMPUR (May 13): AmInvestment Bank forecasts lower consumer spending ahead due to higher than expected interest rates and inflationary pressures, which in turn will affect the improvement in the real estate investment trust sector ( REIT).

In an industry update Friday, May 13, the research house said its in-house economist forecast another 25 basis points (bps) overnight rate hike (OPR) in July this year.

On Wednesday, the Monetary Policy Committee (MPC) of Bank Negara Malaysia (BNM) had raised the OPR by 25 basis points to 2%, from a record low of 1.75% since July 7, 2020.

“It is estimated that the higher OPR rate will prevent the ringgit from weakening further against the US dollar due to the interest rate differential between the two countries,” AmInvestment said.

“Rising interest rates and inflation are expected to weigh on personal consumption spending due to higher borrowing costs and higher prices for consumer goods.

“As a result, upcoming renter sales are expected to slow as consumers may become cautious about spending on discretionary goods.”

Therefore, he predicted that rent reversion would remain steady for malls in prime locations and possibly unfavorable reversion for less established malls.

“Rent reversion is expected to remain flat in prime malls, but could turn negative in unpopular malls with low traffic to retain existing tenants and attract new tenants.

“As malls can only renew leases with higher rental rates if tenant sales improve,” AmInvestment Bank said.

He said tenants will feel additional pain once Covid-19 rental discounts to mall tenants end in the next quarter in line with the easing of the lockdown and the reopening of the economy.

The removal of Covid-19 related support will lead to a normalization of rental income in the retail segment.

AmInvestment Bank further pointed out that “revenge spending”, possibly seen in the first quarter of 2022 (1Q22) of retail sales recovering to near pre-pandemic levels, is turning into “moderate spending”, such as the noted the Malaysian Institute of Economic Research (MIER).

He said REIT players that have a well-diversified revenue base such as Sunway, whose portfolio includes shopping malls, offices, hotels, universities, hospitals and industrial property across the country, have better odds against potential downside risks.

AmInvestment added that REIT distribution yields will remain unattractive due to lower yields relative to 10-year Malaysian government securities (MGS).

“With higher interest rate expectations in the United States, a further rise in the 10-year AMS and 10-year US Treasuries could lead to a deeper contraction in the yield spread between REITs and the MGS at 10 years.

“The corporate yield spread under our coverage is now mostly negative versus the 10-year AMS,” AmInvestment said.

He believes market sentiment on REITs will remain lackluster in the near term due to unattractive supply for investors looking for yield.

“The targeted average distribution yield for calendar year 2023 (CY23F) for the REITs under our coverage is 6.4%,” he said.

AmInvestment said its top ‘buy’ is Sunway REIT (fair value RM1.66), backed by its well-diversified revenue base, which could provide a cushion against potential downside risks, adding that its portfolio includes centers commercial, offices, hotels and universities. , hospitals and industrial property across Malaysia.

“We are also positive about the outlook for Sunway eMall, which offers in-store delivery and pickup for online purchases at its physical malls.

“The group is recognized for its environmental, social and governance (ESG) practices. Specifically, Sunway REIT is the first among its local peers to integrate a financial consideration of sustainability into its capital management strategy”, he said. he declares.