AL-SALAM REIT ANNUAL REPORT 2017

48 AL-SALĀM REIT ANNUAL REPORT 2017 MARKET REPORT SUMMARY 1. ECONOMIC OVERVIEW The Malaysian economy performed exceptionally good last year driven by a resilient domestic demand due to the improvements in both investment and consumption and reinforced by a sturdy global demand. The first three quarters displayed a better-then-expected performance with the real GDP growing by 5.6% in the first quarter and accelerating to 5.8% and 6.2% in the second quarter and third quarter, respectively. For the year as a whole, Bank Negara Malaysia reported that the Malaysian economy recorded a growth of 5.9% (2016: 4.2%). With an accommodating domestic development amid buoyant external demand, Malaysian economy is expected to grow at 5.4% this year, again driven by domestic demand, which in turn is projected to grow at 5.2%. The private sector, both consumers and producers, is anticipated to continually provide impetus for domestic demand. The external sector is expected to remain strong although the growth rates both for exports and imports are projected lower due to the base effect of a high growth realised last year. The growth momentum is expected to persist into next year, with the expected GDP growth rate in a range of 4.8-5.3%. (Source: Official website of Bank Negara Malaysia and Malaysian Institute of Economic Research) 2. MALAYSIAN REIT The 10-year MGS yield has ranged higher at 4.0-4.3% in Jan- Apr 2017, due to less favourable macroeconomic factors such as weakening of the MYR and suppressed crude oil prices. In May-12 Dec 2017, the 10-year MGS yield ranged lower at 3.8%-4.1%. 2017 YTD, the 10-year MGS yield has increased to an average of 4.00% (2016: 3.84%). Conversely, M-REITs’ net DPU yield (1-year forward) inched down to 5.30% average for 2017 YTD (2016: 5.31%). This led to yield spreads of M-REITs over the 10-year MGS being lower at 130bps, vs. 147bps for 2016. M-REITs underperformed in 2017 YTD – the sector average is down -4% vs. KLCI’s +5%. It is believed M-REITs’ moderation in unit prices is partly attributed to their 2016 outperformance (+13%) for their resilient earnings and on cautious corporate earnings outlook across selected sectors. In 2017, broad property oversupply has impacted investors’ sentiment on the REITs too. It is expected the outlook to remain challenging for M-REITS as they could face occupancy risk due to oversupply. 2018 is likely to see BNM OPR hike; this offers opportunity to accumulate the quality REITs on weakness. Maybank Economics Team expects a +25bps OPR hike to 3.25% (May 2018 as the earliest possible timing) which is reflective of BNM’s confidence in the strength of both global and domestic economic growth in 2017 sustaining into 2018. BNM has also signalled for higher OPR bias in its Monetary Policy Statement dated 9 Nov 2017. With higher interest rates being generally negative on the REITs (with unit prices expected to adjust down amid higher fixed income yields), we would position to accumulate the quality REITs on weaknesses in their unit prices. Nevertheless, it is a forecasted a higher aggregate core EPU growth of +5.1% YoY in 2018 (2017E: +O.6% YoY) on sustained occupancy rates, rental step-ups, positive rental reversions, and asset injections. Maybank IB Research remain positive only on M-REITs with prime shopping malls and office assets with tenants on long-term or triple net leases which entail lower occupancy risks. While there is no official effective date for the revised REIT Guidelines by the Securities Commission (SC), it is generally positive on several amendments which could enhance unitholders’ value (as observed from the SC’s public consultation paper in 2H16). Potential major positives from the revised guidelines are allowing redevelopment activities, a fixed gearing limit and extension of the non-Shariah compliant tenants’ tenure. (Extracted from Research report 2018: Outlook & lookouts by Maybank IB Research, 15 December 2017)