Sunway-REIT may have a balanced buffer against sector risk exposures thanks to its diversified assets and strong brand equity, said Kenanga Research.
PETALING JAYA: Analysts have expressed concern that a slowdown in consumer spending may impact the medium-term outlook for local Real Estate Investment Trusts (REITs).
Kenanga Research noted while REITS with commercial space such as malls would continue to enjoy healthy footfall and rental yields, high inflation and subsidy rationalisation are headwinds that could impact the sector’s earnings and valuations.
The office space market remained bearish due to oversupply, which would pressure yields despite property owners resorting to various measures to improve offering to raise tenancy levels, the research house said.
“In the near-term, the outlook for retail spending could be dampened by the implementation of targeted fuel subsidies which could reduce the disposable income of the middle to upper higher income brackets,” the research house noted in its sector report.It added that inflationary pressure could affect overall retail appetite.
While office spaces are becoming more relevant with increasing return of workers to the office environment, overall occupancy levels could be thin as the incremental supply of new office spaces may outweigh the modest rise in take-up of space.
The National Property Information Centre stated several new office buildings were completed in the first half of the year, adding some 61,000 sq m of space into the fundamentally bearish market. Kenanga Research has recalibrated its valuations for REITs under coverage, leading it to cut its target price for IGB-REIT and Sunway-REIT to RM1.66 and RM1.63 per unit respectively from RM1.80 and RM1.93 previously.
The research outfit, however, retained its “neutral” call on the sector.
It noted that KLCC-REIT and Pavilion-REIT would likely continue to be more in tune with the affluent market though the latter is raising its exposure to a wider consumer segment with the addition of neighbourhood-oriented assets to its portfolio such as the Pavilion Bukit Jalil.
It expects IGB-REIT and Sunway-REIT to continue to cater to a good mix across segments, while Sunway-REIT also has more diversified asset types including hospitality and office.
The research house liked REITs with a niche in industrial and retail and/or own property assets in prime and strategic locations, which would continue to provide resilient rental income streams.
From a valuation angle, KLCC-REIT and Sunway-REIT are its sector picks as their risk-to-reward outlook remains favourable.“We expect KLCC-REIT to remain resilient thanks to its highly prime location and assets which we believe are less susceptible to spending pressures.
“On the other hand, Sunway-REIT may have a balanced buffer against sector risk exposures thanks to its diversified assets and strong brand equity,” Kenanga Research stated.
It remained cautious on Axis-REIT as the industrial REIT’s occupancy rates had declined from 95% at end-December last year to 89% at end-June 2023, which is likely to adversely affect its earnings and signal further near-term uncertainty.
