The challenging outlook for the Malaysia REITs sector still persists says Kenanga, according to the recently released 2022 Property Market Report by the National Property Information Centre (NAPIC), the supply-demand imbalance continues to weigh especially on the office and retail segments.
Extracting the data (as of end-December 2022) for the whole of Malaysia, the latest yearly report unveiled an occupancy rate of 78.5% for the purpose-built office space (based on an occupied space of 19.1m sq m against total office space of 24.3m sq m), down slightly from 78.9% end-2021, and 75.4% for retail space in shopping complexes (derived from occupied space of 13.2m sq m on total retail space of 17.5m sq m), sliding further from 76.3% end-2021.
Going forward, the research house believes the occupancy rates for both the purpose-built office space and the retail segment will remain under pressure. Against the already overhang backdrop, more supply is expected to come on stream as the NAPIC report has forecasted for the purpose-built office space, an incremental 1.53m sq m is under physical construction and another 0.99m sq m attributable to planned supply (where building plan approvals have been obtained), accounting for a combined 10.4% of existing supply, and for retail space in shopping complexes, 1.38m sq m (from construction in progress) and 0.35m sq m (from planned supply) may be added (representing an extra 9.9% of existing supply).
On the demand side, following the full resumption of economic activities post the pandemic, the take-up rate for office and retail spaces will likely be muted amid the prevailing jittery economic prospects and elevated inflation worries. MGS yield headwinds ahead. The 10-year Malaysian Government Securities (MGS) yield – a risk-free benchmark used by us as a valuation reference to impute the corresponding yield spreads in deriving our individual target prices – has climbed from a
recent low of 3.74% in late January this year to as high as 4.06% in early March before slipping to 3.90% (Exhibit 2). This follows its previous slide from a high of 4.55% in October last year due to initial expectations that global interest rates might have peaked already. Yet, amid the volatile movements, we reckon interest rates could remain elevated in view of the sticky high inflationary environment, prompting us to maintain our 10-year MGS yield assumption at 4.5% for our computation of individual target yields.
Amid the still challenging industry dynamics, Kenanga views the sector as NEUTRAL and like MREITs with attributes of being niche in the right business segments particularly in industrial and retail or own property assets in prime and strategic locations, which will continue to provide resilient rental income streams.
On valuation grounds, PAVREIT remains our sector pick, offering a potential total return of 15.8%. And remain cautious on SENTRAL.
