The recently released first half Property Market Report by the National Property Information Centre showed that the overhang story – especially in the office and retail segments – is still weighing on the Malaysia REITs sector fundamentals. According to the report, as of end-June 2022, for the whole of Malaysia total purpose-built office space stood at 24.2m sq m with occupied space of 18.8m sq m, resulting in an occupancy rate of 77.7%, and overall retail space in shopping complexes was at 17.4m sq m of which 75.7% was occupied.
Concerningly, there will be more supply coming onstream with the NAPIC report projecting an additional 1.5m sq m under construction and another 1.1m sq m from the planned supply which add up to a combined 10.7% of the existing supply of purpose-built office space, and 1.6m sq m of retail space in shopping complexes in the pipeline. And yet, post the knee-jerk recovery from Covid-triggered movement restrictions, the underlying demand for office and retail spaces will likely remain soft in view of the uncertain economic outlook.
On balance, this is expected to exert further downward pressure on overall occupancy rates for both the purpose-built office space and retail segment.
Following a previous climb from a trough in early August 2020 to a high of 4.50% in early May this year the 10-year Malaysian Government Securities yield has resumed its upward trend lately to close at 4.39%. This is nearing Kenanga’s assumption of 4.5% for the 10-year MGS yield, a risk-free benchmark was used as a valuation reference to impute the corresponding yield spreads in deriving our individual target prices. In reaction to the rising 10-year MGS yield trend, share prices in MREITs have drifted lower as tracked by the Bursa REIT Index.
Broadly speaking, against a backdrop of persistent oversupply, Kenanga views MREITs with exposure in the right business segments (particularly in industrial and retail) and/or own property assets in prime locations (like the city centre) will continue to benefit from resilient rental income streams. Notwithstanding the challenging sector fundamentals, selected values are emerging following their recent share price weakness
