As the broader market succumbed to sell-off due to the backdrop of rising interest rates, KL REIT Index outperformed KLCI by registering a lower YTD loss of -3.7% against KLCI YTD losses of -10.8% due to the defensiveness of REITs. The decline is also due to a hike in OPR and a narrowing spread between MGS yield and yield of REIT which reduced the attractiveness of REIT.
MIDF reckons that rising interest rates would increase the financing cost of REITs, it sees the broader outlook for REITs remain positive in 4QCY22 and CY23 due to recovery in rental income and higher tourist arrivals. Besides, the average distribution yield of REIT is expected to recover to 5.7% in CY23 which it deems remains attractive against MGS yield of 4.4%.
Retail REITs reported earnings recovery in 1HCY22 due to recovery in shopper footfall and significantly lower rental assistance to tenants. MIDF gathers that shopper footfall at the established malls such as Sunway Pyramid and Mid Valley Megamall had recovered close to pre-pandemic level. Meanwhile, tenant sales improved and that led to rental reversion returned to positive territory. Looking ahead, it expects earnings of retail REITs to remain strong in 4QCY22 mainly due to the positive rental reversion outlook.
As for earnings of industrial REITs, namely Axis REIT remained resilient as they recorded core earnings growth of +29%yoy and +14.5%yoy growth in core EPU. The solid earnings were underpinned by positive rental reversion and contribution from newly acquired assets. The research house sees that the performance of industrial REITs would remain stable going forward due to solid demand for industrial space particularly due to growing demand from e-commerce.
Demand for office space is still a bother, the sector was weaker in the past two years due to Covid-19 pandemic following the structural shift to more hybrid working. Nevertheless, with the reopening of economic activities and more employees being encouraged to work from the office, MIDF expects demand for office space to recover gradually.
Retail segment and hotel segment may benefit from Budget 2023 as it is widely expected that cash goodies will be dished out to B40 group. If the expectation of cash goodies materialises, MIDF expects some spillover effect to retail REIT as people will allocate a portion of the cash goodies for retail spending. There could also be potential incentives from Budget 2023 to promote the tourism sector of Malaysia would be positive for REITs. The higher tourist arrival would help improve the footfall of shopping malls and help in tenants’ sales.
Outlook for REITs is expected to remain positive in CY23 as the risk of another lockdown is low. As Malaysia is transitioning from Covid-19 pandemic to the endemic, economic activities are expected to be fully normalized in CY23 and that would support the recovery of REITs. In addition, the potential for more country border reopening in CY23, particularly in China is expected to benefit the retail and hotel industry of Malaysia as that will lift tourist arrival significantly. In this context,
MIDF sees REITs such as Pavilion REIT, KLCCP Stapled Group, and Sunway REIT to benefit from higher tourist arrival in CY23
as their retail malls are tourist destinations.
