CIMB Research said the sector has a stable earnings profile.
PETALING JAYA: Amid an uncertain economic climate, real estate investment trusts (REITs) are emerging as a defensive shelter for investors, analysts say.
CIMB Research said the sector has a stable earnings profile, thanks to limited reliance on turnover-based rents.
The research house added that a potential cut of 25 basis points to the overnight policy rate this year could also raise the distribution per unit by REITs by up to 0.3% through lower borrowing costs.
It noted that should the rate cut happen, it would mark the first cut since July 2020.
“This development is positive for REITs, as it would reduce borrowing costs. For REITs under our coverage, financing expenses account for an average of 42% of total costs, making them particularly sensitive to interest rate movements,” CIMB Research said.
According to the research house, Al-Aqar Healthcare-REIT stands to benefit the most if a rate cut takes place, given its 100% exposure to floating-rate borrowings and relatively high gearing level of 41%.
Additionally, both Sunway-REIT and Axis-REIT, with 45% and 47% exposure to floating-rate debt, respectively, are also expected to benefit, albeit to a lesser extent.
“Another 25-basis-point rate cut could lead to an increase in forecast earnings of 1.4% for Sunway-REIT and 0.9% for Axis-REIT,” the research house said.
It added that another reason for its upbeat sentiment on the sector was that tariffs were unlikely to impact tenancy agreements.
Only if US tariffs on its trading partners remain sustained at an elevated rate would there be risks to tenancy renewals, rental revisions and tenant sales.
The research house said it had assessed the REIT’s under its coverage for exposure to export-oriented tenants, retail assets and leases up for renewal this year.
“Our analysis indicates that Axis-REIT has the highest exposure to export-oriented tenants, given its portfolio of industrial assets occupied by companies in the logistics and manufacturing sectors,” the research house said.
As of last year, tenants from the logistics and manufacturing segments accounted for 38% and 29%, respectively, of Axis-REIT’s tenant base.
CIMB Research said, in contrast, retail REITs are more exposed to shifts in consumer spending, as a portion of their rental income is tied to the sales performance of tenants.
As of last year, about 10% to 16% of total rental income for Sunway-REIT and IGB-REIT was derived from sales-based rent components.
“While concerns over consumer sentiment persist amid the potential ripple effects of US tariffs, we believe the downside could be partially cushioned by the rise in the national minimum wage and adjustments to the salaries of civil servants,” the research house said.
The research house said it was maintaining a “neutral” call on the sector, as the current 12-month forward distribution yield spread over 10-year Malaysian Government Securities is estimated at 2% and slightly above the 10- year historical average of 1.8%.
“Our top picks are Axis-REIT and Sunway-REIT, supported by attractive unit-price upside of 10% to 16% and distribution yields ranging between 5.4% and 5.8%,” the research house said, adding that downside risks for the sector include the potential imposition of higher service taxes on tenants, softening occupancy rates and weaker-than-expected rental revisions.
