RHB Research said M-REITs have minimal downside risks to earnings in the short term.
PETALING JAYA: While Malaysian real estate investment trusts (M-REITs) remain a steady defensive play, the sector seems to have limited catalysts to boost its share prices.
According to RHB Research, which has a “neutral” recommendation on M-REITs, the reasons for the limited rerating catalysts is due to the structural oversupply in the retail and office sectors, high interest rates globally and gradual return of tourists to Malaysia.
Nevertheless, the brokerage said M-REITs have minimal downside risks to earnings in the short term.
With sector’s dividend yield spread versus the 10-year Malaysia government securities yield being close to plus one standard deviation from the historical mean, M-REITs offer a steady defensive play for investors, it added.
By sector, RHB Research said industrial REITs remain attractive, while the office segment was stabilising and retail segment was still strong.
“The pace of industrial acquisitions has slowed down following the sharp rise in valuations during the pandemic as asset owners placed a premium on their properties, compressing the property yield.
“That said, because of the favourable supply-demand dynamics for landlords, we remain positive on industrial assets, which should record healthy rental reversions each year with minimal risk of non-renewals,” it explained.
On the office segment, RHB Research noted occupancy in Kuala Lumpur had increased slightly to 73.5% in the first half of 2023 (1H23) as compared to 71.6% in 1H22, possibly due to more employees returning to office since the economic reopening.
“That said, the flight to quality trend remains, especially as the supply of green certified office buildings come into the market over the medium term,” it said.
As for retail REITs, the segment continued to be stable, backed by a strong domestic economy.
“Occupancy rates for malls under our coverage have also remained robust, underpinning the various management teams’ guidance of mid-single digit rental reversions for 2023.
“As such, the retail REITs under our coverage are well positioned to capitalise on the seasonally stronger fourth quarter due to the year-end festivities,” RHB Research said.
It was, nevertheless, cautious on the incoming supply of new malls, which could compress long-term rental reversions, especially as the new malls offer many of the same anchor tenants as existing malls.
“We think that REITs track record in refreshing offerings from hosting events and updating tenant mix can keep their malls competitive.
“We also keep an eye out on policy risks that could impact consumer’s spending power such as the introduction of a luxury tax, subsidy rationalisation, and the reintroduction of the goods and services tax,” it said.
RHB Research said Axis-REIT was its new top pick for the industrial segment, while IGB-REIT was its favoured fund for the retail segment.
