Appealing REIT take-up rate

REAL estate investment trusts (REITs) have proven to be a shelter in times of uncertainty.

Year-to-date, the Bursa Malaysia REIT index is up by over 7%, outperforming the benchmark FBM KLCI which is down by 6%.

Consequently, many of the major REIT stocks have gained much but analysts reckon that there is still upside to be reaped.

Rakuten Trade head of equity sales Vincent Lau says Bank Negara Malaysia’s recent overnight policy rate (OPR) cut is a positive for the sector.

“The cut is good as REITs borrowing costs are now lower when they buy their assets. Nevertheless, the sales and service tax (SST) may also have some impact,” he says.

Bank Negara Malaysia reduced the OPR by 25 basis points to 2.75% on July 9 while the SST expanded on July 1, with new taxes on goods and services.

The stability of 5% to 7% dividend yields still makes REITs – which own income-producing real estate – attractive, Lau says.

He suggests investors look at higher-yielding laggard REITs such as Paradigm-REIT which is still below its initial public offering (IPO) price, and with a 7% projected yield.

Paradigm-REIT, which made its debut on the Main Market of Bursa Malaysia in June, was the largest REIT IPO in the last 13 years and one of the biggest in Malaysia this year.

Paradigm-REIT is a pure retail-play REIT and has in its portfolio three retail malls, namely, Paradigm JB, Paradigm PJ and Bukit Tinggi Shopping Centre.

“Funds have been been worried about the increasingly volatile global market situation and have been ‘hiding’ in REITs as they are generally defensive in nature,” says another analyst who tracks the industry.

Defensive nature

He notes the nature of REITs which includes a steady income and the ability to raise rentals for new tenants following fresh tenancy renewals, tends to be what REIT investors, typically yield seekers, look for in times of market uncertainty.

As at April, there were 19 REITs listed on Bursa including AmFirst-REIT, Capitaland Malaysia Trust (CLMT), Axis-REIT, YTL Hospitality-REIT, Pavilion-REIT and Sunway-REIT.

In a note on the sector, Hong Leong Investment Bank analyst Jack Heng says looking ahead, retail and hospitality REITs stand to gain from stronger tourism.

“Also, industrial REITs are robustly supported by foreign direct investment and domestic direct investment inflows.

“Similarly, office REITs are showing recovery as supply growth moderates and high-tech sector demand lifts occupancy.

“Given persistent macro risks and inherent stability, we upgrade the sector to ‘overweight’. The top picks are Sunway-REIT and Axis-REIT,” he says in a July 15 note to clients.

He also notes that the yield spread between the 10-year Malaysian Government Securities MGS and REITs under its coverage has widened, signalling attractive valuations.

The valuation of REITs comes from MGS yield assumptions.

“We believe US President Donald Trump remains a key man risk, capable of unsettling global markets through abrupt policy pivots and market-moving rhetoric.

“Ongoing Middle East tension adds another layer of uncertainty. Hence, we expect REITs to remain attractive for their relative stability and defensive characteristics.

“Furthermore, the 10-year MGS yield has eased to less than 3.5%, from 3.8% in January, driven by strong inflows and benefiting from the recent 25 basis points OPR rate cut. This further widens yield spreads and enhances the risk-reward profile for REITs.”

Kenanga Research analyst Chris Tong isn’t as upbeat on the sector.

He has maintained a “neutral” stance on the sector saying that Kenanga Research had earlier anticipated that the sector’s stability could appeal to investors amid recent market volatility, fueled by ongoing US tariff headlines and global trade uncertainties.

“On the 8% SST, we see only marginal immediate impact to the REIT sector as we believe the cost pass-through to consumers in the retail segment is achievable with a slight upward revision in product prices, while certain segments such as office and industrial will be more insulated on better financial capacity and longer lease terms.”

That said, Tong reckons the SST may hinder mall operators’ near-term ability to raise rents “should the SST cause apprehension among tenants”.

On the flipside, he notes that the latest OPR cut will boost sentiment in the sector but valuations appear to have been adequately priced in since the second quarter of this year in anticipation of the cut.

“We take this opportunity to downgrade Sunway-REIT from ‘outperform’ to ‘market perform’ following its share price appreciation.

“We also trim our target price for CLMT following the net earnings per share dilutive effect of circa 7% from its proposed placement which also warrants a downgrade.

“Meanwhile, our ‘not rated’ call on Paradigm-REIT may interest investors for its appealing prospects in Johor’s growing market and a 7% above- average net dividend yield in FY26,” Tong adds.