January 23, 2018, Tuesday
KUCHING: Real estate investment trusts (REITs) is expected by analysts to have potential earnings impact of 0.2 per cent to 2.1 per cent from higher borrowing costs.
According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), market is expecting an announcement of a 25 basis points (bps) increase in overnight policy rate (OPR) to be announced later this Thursday.
Some had even predicted the possibility of two rate hikes of 25 bps each for 2018 while MIDF Research’s house expected only one rate hike this year.
Based on the research arm’s sensitivity analysis, earnings per unit (EPUs) of REITs under its coverage are limited to minus 0.2 per cent to minus 2.1 per cent if there is one rate hike of 25bps.
“REITs with higher floating rate loans are more likely to be affected by the increase in interest rate,” it said.
Among the REITs that MIDF Research covered, Amanahraya REIT’s loans were all based on floating rates.
“Conversely, IGB REIT’s floating rate loans was only kept at one per cent.”
The research arm gathered that REIT managers were working on converting part of their floating rate loans to fixed rate loans to mitigate the risk of potentially higher interest costs.
MIDF Research highlighted that although a rate hike may have adverse impact to the bottomlines of REITs notably due to higher borrowing costs and potentially a slightly narrower spread between 10-year Malaysian Government Securities (MGS) yield and dividend yields from REITs, other factors at play may change the dynamic of the unit price movement.
“For instance, when Bank Negara announced a 25bps rate increase on July 10, 2014, price movements of REITs were mixed,” it said.
“Of the seven REITs under our coverage, only two REITs showed downward price movement of minus 5.9 per cent (Capitaland Malaysia Mall Trust) and minus 6.7 per cent (Amanahraya REIT).
“The rest had showed positive movement from the period of July 10, 2014 until December 10, 2014.”
All in, MIDF Research kept its estimates unchanged until the actual announcement of the rate hike and maintained ‘neutral’ on the sector.