KUALA LUMPUR: The outlook for retail real estate investment trusts (REIT) remains stable owing to the strong domestic economy and robust occupancy rates for malls under its coverage, said RHB Research.
It said the high tenancy levels underpin management teams' expectations of mid-single digit rental reversions for FY23.
"As such, the retail REITs under our coverage are well positioned to capitalise on the seasonally stronger 4Q due to the year-end festivities," it added in a sector update.
However, the research firm, which has a "neutral" call on the REIT sector, said rerating catalysts remain limited amid the structural oversupply in the retail and office sectors, high interest rates globally, and gradual return of tourists to Malaysia.
RHB added that the incoming supply of new malls could prove to be headwinds for retail REITs with compression of long-term rental reversions as the new malls offer many of the same anchor tenants as existing malls.
"In this regard, we think that REITs’ track record in refreshing offerings from hosting events and updating tenant mix can keep their malls competitive," it said.
Meanwhile, the research firm is also wary of potential policy risks that could impact consumer’s spending power such as the introduction of a luxury tax, subsidy rationalisation, and/or the reintroduction of the Goods and Services Tax (GST).
RHB's top pick in the retail sector is IGB REIT, due to its fully occupied properties and high proportion of turnover rent, which could benefit from a pick-up in retail sales.
In the office space, RHB said occupancy in Kuala Lumpur has increased slightly y-o-y to 73.5% in 1H23, possibly due to more employees returning to office since the economic reopening.
However, it said the flight to quality trend remains, especially as the supply of green-certified office buildings come into the market over the medium term.
The research firm said despite the slowdown in industrial acquisitions due to a sharp rise in valuations during the pandemic, it remains positive on industrial assets as there are favourable supply-demand dynamics for landlords.
"Industrial assets should record healthy rental reversions each year with minimal risk of non-renewals," it said.
RHB's top pick in the industrial segment is Axis REIT, in anticipation of its occupancy level rising following the signing of new tenancies and the commencement of its lease with SPX Xpress at the newly redeveloped Bukit Raja Distribution Centre 2.