Luxury Goods Tax Could Take A Toll On Retail REIT

The Government is proposing a luxury tax to be implemented this year on items that include fashion goods and luxury watches. While details remain sparse, RHB Research house believes the M-REITs under its coverage that are more affected by this would be KLCCP Stapled and Pavilion REIT this is because their flagship city-centric malls target customers in the middle- to upper-income brackets.

However, RHB did not that the impact to the REITs should be minimal. A lot of the retail sales growth in the past year has been attributed to the fashion tenants that make up a high proportion of NLA for Pavilion Kuala Lumpur and Suria KLCC. While the proposed luxury tax might reduce retail sales, and subsequently affect rental reversion rates, the net impact should be minimal – this is because the increase in the number of tourists this year to boost retail spending at those malls. A total of MYR250m has been allocated to promote the tourism sector in Budget 2023, targeting an arrival of 23.5m international tourists in 2025.

Prime Minister Dato’ Seri Anwar Ibrahim also mentioned the increase in electricity tariff to large companies that were previously announced in Dec 2022. The electricity surcharge would increase from 3.7 sen to 20 sen per kWh from January to June. While electricity makes up c.90% of REITs’ utility costs, utilities only make up 20% of the total property operating expense – the respective management teams have guided for a minimal impact to DPU of c.3%. Furthermore, REITs could opt to pass on the increase in electricity costs to tenants to further mitigate the rate hike.

Overall, RHB said the impact of both the luxury tax and electricity tariff hikes is minimal to this sector. Its top picks are Axis REIT (AXRB MK, BUY, TP: MYR2.14) and Pavilion REIT. Axis REIT remains the sector’s Top Pick, with the REIT’s acquisition and redevelopment plans expected to drive earnings growth in the medium to long term. Pavilion REIT is pick for the retail segment, as there is still room for its blended occupancy rate to rise – the planned acquisition of Pavilion Bukit Jalil in 2Q23 is also positive for the REIT’s long-term prospects, as the new mall will be another key income contributor apart from
Pavilion Kuala Lumpur

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