The Malaysian Real Estate Investment Trust (M-REIT) sector is likely to continue offering a steady defensive play with operating metrics mostly back to normal, said RHB Research (RHB), adding that the sector’s dividend yield spread versus the 10-year Malaysian Government Securities yield is also above the historical average.
“We maintain our Neutral sector weighting, as the structural supply-demand mismatch continues to weigh on the long-term outlook, but we are positive on the industrial segment which remains on an upward growth trajectory,” said RHB in the recent Malaysia Sector Update Report.
With the number of tourist arrivals still well below pre-pandemic levels, footfall in tourist-centric shopping malls such as Suria KLCC and Pavilion Kuala Lumpur are yet to fully recover, but tenant sales have continued to be strong, backed by the stable domestic economy.
As a result, most retail REITs under RHB’s coverage were guided for mid-single digit rental reversions in financial year 2023. At the time of writing, we are still waiting on further details on the proposed luxury tax which could hamper retail sales.
Previously, Prime Minister Dato’ Seri Anwar Ibrahim suggested that the proposed tax could be imposed on fashion items, which has been one of the better performing retail segments in the past year.
Incoming supply of malls in Klang Valley will add 3.4 million sq ft of NLA in 2023, exceeding the 2.7 million sq ft in 2022. The two biggest malls will be The Exchange Mall @ TRX (1.3 million sq ft) and KSL Esplanade Mall (650k sq ft).
“We are cautious of the impact on the increased competition in an already saturated market. Landlords will need to bring in footfall by refreshing its offerings and hosting events to keep its malls attractive,” said RHB.
The office segment remains a tenant’s market, brought on by the widening supply-demand imbalance stemming from an increase in supply and the adoption of hybrid work models, but grade-A offices should remain competitive as companies opt for higher-quality office spaces.
The industrial segment’s positive outlook continues to be driven by strong demand, underpinned by the diversion from China by multinational corporations.
The current yield spread between the KL REIT Index and 10-year Malaysia Government Securities is at 195 basis points, close to +1 standard deviation above the historical average following the recent share price correction.
“We believe that, with interest rate hikes nearing an end, this should support the valuation for M-REITs and keep the yield spread hovering around current levels,” said RHB.
AME REIT is the research house’s top pick due to its acquisitions made to drive earnings growth in the medium to long term, further backed by a visible pipeline of new assets from its sponsor.
“We also like IGB REIT in the retail segment as a proxy to the strong retail momentum, due to its fully occupied malls and higher-than-average proportion of turnover rent. The REIT is also shielded from the impact of the rise in interest rates, with all borrowings secured at a fixed rate,” said RHB.
