PETALING JAYA: The implied target yields for Malaysian real estate investment trusts (REITs) are expected to remain stable for this year based on the assumption that Bank Negara’s overnight policy rate (OPR) remains at 3%.
Kenanga Research said it hopes the next move by Bank Negara will be a rate cut rather than a hike, which is set to augur well for REIT valuations.
As for the 10-year Malaysian Government Securities yield, the risk-free rate benchmark used for valuation stayed below 4% since moving from its peak of 4.75% in October 2022, leading Kenanga to assume a 4% risk-free REIT valuation.
The research house said it prefers retail REITs that are strategically located, especially with the upcoming openings of the 118 Mall and Pavilion Damansara Heights in the Klang Valley.
However, Kenanga Research noted it is mindful of competition in terms of footfall as it expects The Exchange TRX to be impacted due to the proximity of the new malls, on top of older ones like Pavilion Bukit Bintang and Suria KLCC.
“The crowded market could be partially cushioned by the relaxation on visa requirements for several neighbouring countries, coupled with a lower ringgit.
“Additionally, we believe tourism will be on the rise in the coming quarters, benefiting the retail segment,” the research house said.
It added that mall occupancy rates had increased in the second half of last year, supporting higher rental income from improved tenant sales amid rising footfall and sustained occupancy levels, especially in prime shopping centres in Klang Valley.
Meanwhile, for office REITs, Kenanga Research expects more office space to hit the market as there are five new office buildings pending completion in the first half of this year.
Among them include Felcra Tower and incoming space at The Exchange TRX by Lendlease, which is set to contribute 1.4 million sq ft to the Klang Valley’s existing cumulative office stock.
“These will be on the heels of the recent completion of four new office developments – Merdeka 118 tower, the PNB 1194 office building, Aspire Tower and Pavilion Damansara Heights Corporate Tower – which contributed to a drop in overall purpose-built office occupancy rate to 78.6% from 79% in June 2023,” it said.
The research house noted that Grade A buildings in decentralised locations with strong connectivity and green certifications will stay resilient due to its strong demand.
Kenanga Research’s top picks included KLCC-REIT for its appeal to foreign shoppers and having the advantage of a higher-income customer group that likely is not affected by proposed tax hikes.
Sunway-REIT is also a favourite for the research house due to the fact that it will experience milder impact from the entry of The Exchange TRX given its landmark assets’ distance to the mall, coupled with being the landlord for numerous Grade A office buildings in prime locations.
In line with all these factors, Kenanga Research said has maintained a “neutral” call on the sector.
