Kenanga Research said the potential value to be extracted had been moderately priced in by the market.
PETALING JAYA: The recent run-up in the share prices of real estate investment trusts (REITs), coupled with the hunt for tenants in specific segments of the market, is prompting a re-evaluation of REITs by analysts.
Analysts at Kenanga Research and Hong Leong Investment Bank Research (HLIB Research) said they would be employing a stock-picking strategy given the lofty valuations of REITs under their coverage.
Noting that it still continued to see opportunities in certain REITs, Kenanga Research said the potential value to be extracted had been moderately priced in by the market following its previous “outperform” calls on big-cap REITs such as KLCC-REIT and Sunway-REIT, where prices had risen 3% to 12% over the past three months.
Kenanga Research also downgraded REITs to “neutral” from “overweight” but continued to recommend Sunway-REIT as its top pick due to earnings catalysts such as the opening of Sunway Pyramid’s Oasis wing where tenants pay significantly higher rates and an additional 200,000 sq ft of space in Sunway Carnival Mall to be added by the first half of this year.
“We are also positive on Pavilion-REIT as its crown jewel, Pavilion KL, continues to demonstrate resilience in sustaining strong footfall even after the debut of rival TRX mall. Meanwhile, we believe the recent share price weakness in Capitaland Malaysia Trust
is unwarranted, presenting an opportunity for investors to accumulate,” the research house added.
Kenanga Research said it expected a strong recovery ahead for the hospitality segment while noting that occupancy and rental rates in the office segment have been fairly maintained.
“Besides seeing growing demand for office space from high-growth sectors such as technology and finance, we believe offices on the fringe of Kuala Lumpur and Selangor that are highly integrated are in a better position compared with Kuala Lumpur as affordability remains a key concern for Malaysian corporations,” it added.
For HLIB Research, which has maintained a “neutral” call on REITs, the office segment faces persistent vacancy challenges with limited rental growth given the oversupply and an elevated vacancy rate of 33% as of the third quarter of 2024.
The research house said that a projected slowdown in the incoming supply of office space in the greater Kuala Lumpur area may offer some respite going forward.
“Also, demand recovery remains sluggish and struggles to absorb new supply in the Klang Valley, leaving office owners with minimal rental upside and risk of negative rental revision in 2025. From our channel checks, rental revisions are expected to stay flattish, underscoring the subdued outlook,” the research house said.
HLIB Research picked Axis-REIT in the industrial segment for its solid track record, strong tenant base across its diversified portfolio, and robust acquisition pipeline. “Conversely, we remain cautious on office REITs due to persistent oversupply and flat rental revision expectations,” it said.
