The widening gap between REIT and Malaysian Government Securities (MGS) yields (c.6% average within sector) could push yield-seeking investors to further accumulate REIT positions. Analysts anticipate MGS yield to further weaken to 3.6% by year-end, after easing from 4.0% to 3.7%, following the net foreign investment inflows to the bond market.
Meanwhile, retail and hospitality segments are set to see healthy growth going forward.
Kenanga Research reiterate the OVERWEIGHT call on REIT (Real Estate Investment Trust) sector.
REITs with malls and hotels in hot spots are preferred as market observers keep an eye on potentially more subsidy rationalisation in the upcoming 2025 national budget.
The top picks for the sector are Sunway Real Estate Investment Trust (SUNREIT) with a target price of RM1.81 and Pavilion Real Estate Investment Trust (PAVREIT) with a target price of RM1.66. Analysts favour the picks citing recovery in hotel business and further anticipated growth from Sunway Carnival Mall and Pavilion Bukit Jalil.
As at 12:29pm on Wednesday, SUNREIT traded at RM1.73 whereas PAVREIT at RM1.44. (Stock updates from www.klsescreener.com)
Notably, the target price upgrade on SUNREIT is largely attributed to the transformation of Sunway Carnival Mall located in Seberang Perai, Penang. The mall has been remade into a vibrant space featuring mid-to-slightly higher-end brands after the launching of a new wing and renovation of the old one, which makes the mall the highest-percentage-growth mall under the SUNREIT portfolio. Further, another 200k sq ft of space currently under renovation is targeted to be added to the Net Lettable Area (NLA) by the first half of 2025. With progressive incoming tenants, analysts anticipate further increase in occupancy and rental growth in 2025, prompting an upgrade to their 2025 earnings forecast by 2.5%.
In the first six months of 2024, retail occupancy rates in shopping complexes came in at 78.1%, compared to 77.4% for the same period in 2023. With the implementation of diesel subsidy rationalisation, impact on consumer behaviour has been minimal at the current juncture as most logistic vehicles are still eligible for diesel subsidies. Spending will be partially supported by the return of tourists and the up to 13% pay rise for most civil servants in Dec 2024. Market watchers are mindful of the possibility of further subsidy rationalisation in the upcoming 2025 budget.
Office occupancy and rental rates stood at 71.6% in the first half of 2024. Besides seeing growing demand for office spaces from high-growth areas such as technology and finance, office venues within the KL fringe area and Selangor that are highly integrated will still be in demand relative to the golden triangle (city centre) as affordability remains a key concern for Malaysian corporations. More office space is expected for the balance of 2024, and the trend is likely to weigh down on rental rates growth. On the ESG front, more than one-third of the current office space is green-certified, underscoring the importance of sustainability at workplace. (ESG: Environmental Stewardship, Social Responsibility and Governance Excellence)
In the hospitality zone, hotels in the Klang Valley have seen notable recovery in the last quarter of 2024. Hotel room bookings for the coming months have been encouraging. As projected, 27.7m tourist arrivals in Malaysia will push growth for the hoteling business especially names like Sunway and KLCC.
