Malaysian REITs A Solid Defensive Play: RHB IB

(Photo credit: REIT week)

While retail REITs have recovered swiftly this year from the economic reopening, rental reversions could be mitigated in 2023 due to a tough operating environment. The office segment is also seeing lower occupancy rates, with changing work arrangements exacerbating the supply-demand imbalance. Nevertheless, Malaysian REITs (M-REITs) remain a solid defensive play, and the yield spread with Malaysian bonds has recovered to the historical average following the share price downtrend in recent months.

Retail sales momentum to lose steam. The strong performance of the retail REITs was driven by the sales of luxury goods, resulting in higher-than-average sales per customer in many shopping malls. While the festive season in 4Q should buoy sales, there could be a slowdown in 1H23 if inflation levels remain high – especially if footfalls remain below pre-pandemic levels. The weaker MYR will also affect customers’ purchasing power, thereby undermining positive rental reversions in the near term.

A mixed bag for the office segment. While the improved business sentiment (since Malaysia transitioned into the endemic phase) has been a boost for the segment, a hybrid work model is increasingly being adopted – particularly by multi-national corporations (MNCs) trying to provide a flexible working environment for workers. The mismatch between supply and demand will likely continue to be an issue, with an expected 6.1m sqf of office space expected to be opened in 2H22. In this segment, KLCCP Stapled is preferred for its Grade-A office buildings and long-term lease, which should continue to be a stable source of revenue.

Industrial segment remains a bright spot. RHB regional thematic report released earlier this month, titled REITS: The Future Of Industrial Real Estate looked at the emerging trend of Industry 5.0 and how REITs should position themselves to adapt to the changes in market demand. The industrial segment should continue seeing strong demand from the expansion of the manufacturing sector and structural rise in e-commerce.

Yield spread in line with the historical average. Despite a 89bps increase in the Malaysian 10-year bond yield YTD after a 75bps increase in the Overnight Policy Rate (OPR), the yield spread with M-REITs is at 139bps, which is consistent with the historical average after the share price downturn in recent months. The impact of further rate hikes should be minimal on the yield spread, as the market may have already priced in the rate hikes.

RHB Research has maintained NEUTRAL rating on the REIT. Whilst the Top Picks of this sector is AXRB and IGB REIT. The research house chose AXRB as it is a key player in the booming industrial segment, benefitting from the rise in e-commerce; and IGBREIT for its prime assets which are at close-to-full occupancy, and domestic shopper profile which should ensure high footfalls.

Key risks are slower-than-expected economic recovery, higher-than-expected OPR rate hikes.

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