Falling MGS yield makes REITs more enticing

Kenanga Research said the retail segment is set to see a healthy growth moving forward as mall occupancy rates and rental rates were noted to have improved modestly.

PETALING JAYA: Local real estate investment trusts (REITs) are set to become more attractive as the Malaysian Government Security (MGS) yield is anticipated to decline further by year-end, says Kenanga Research.

“Following net foreign investment inflows into the Malaysian bond market, we expect to see MGS yield to further weaken to 3.6% by year-end, after having recently eased from 4% to 3.7%.

“The widening gap between REIT yields will be even more pronounced and could call for yield-seeking investors to further accumulate,” it said in a report.

Kenanga Research said the retail segment is set to see a healthy growth moving forward as mall occupancy rates and rental rates were noted to have improved modestly.

In the first half of 2024 (1H24), the retail occupancy rates in shopping complexes increased to 78.1%, compared to 77.4% in 2H23.

Additionally, policies like the implementation of the diesel subsidy rationalisation have had minimal impact on consumer behaviour.

“We are mindful of the possibility of further subsidy rationalisation in the upcoming Budget 2025.

“However, we believe this will be partially supported by the return of tourists and the up to 13% pay rise for most civil servants in December 2024,” it noted.

The upcoming retail space, such as the 300 sq ft additional net lettable area in Sunway Pyramid and the opening of Pavilion Damansara Heights Phase 2, is also expected to contribute to the segment’s performance.

“We are confident that space in matured malls such as Sunway Pyramid will be easily filled up, given its consistent close-to-full occupancy underpinned by robust demand for retail space.”

As for the hospitality segment, Kenanga Research noted that hotels in the Klang Valley had seen quite a significant recovery in the last quarter, with encouraging hotel room bookings for the coming months.

“Given our in-house projections of 27.7 million tourist arrivals in Malaysia, a 15% increase from 2024, we anticipate to see stronger growth from the hotel business, especially for names like Sunway-REIT and KLCC-REIT.”

The office segment, on the other hand, has seen its occupancy and rental rates fairly maintained, in which occupancy rates for 1H24 stood at 71.6%.

Kenanga Research believes that offices in the Kuala Lumpur (KL) fringe and Selangor areas that are highly integrated will still be in demand relative to KL City area, as affordability remains a key concern for Malaysian corporations.

The market is projected to add another million sq ft to the existing supply of 18.8 million sq ft in 2H24.

“Despite the improving economic environment, we foresee the office market in the Klang Valley to see pressure going forward, given a higher supply compared to previous years, which is likely to weigh down on rental rates’ growth,” the brokerage added.

Kenanga Research reiterates an “overweight” call on the REITs sector with its top sector picks being Sunway-REIT for the recovery in its hospitality arm and growth catalysts from Sunway Carnival Mall; and Pavilion-REIT, underpinned by further occupancy growth in Pavilion Bukit Jalil.