Analysts continued to maintain a “neutral” call on domestic REITs.
PETALING JAYA: Domestic real estate investment trusts (REITs) are expected to have broadly stable earnings despite a number of challenges arising from the impact of the widening of the sales and service tax (SST) at the higher rate of 8% to cover leasing and rental services.
Analysts continued to maintain a “neutral” call on domestic REITs despite noting that their earnings for the first half of this year were largely in line with consensus.
CIMB Research noted that the implementation of 8% SST on leasing services could exert downward pressure on assumptions for rental revisions.
“Our sensitivity analysis suggests that a 1% decline in rental revision could reduce the earnings forecasts for next year (FY26) for the REITs under our coverage by 1.5% on average. For now, we maintain our base-case assumption of mid-single-digit rental revision for FY26, in line with management guidance,” the research house said.
“On a more positive note, the 25-basis-point (bps) overnight policy rate (OPR) cut in July is anticipated to translate into interest cost savings, particularly for REITs with higher floating rate debt exposure. We estimate that every 25-bps decline in a REIT’s floating rate debt could lead to annual cost savings of 0.9% to 3.1% in FY26 for REITs under our coverage,” it added.
Al-Aqar Healthcare-REIT stands out as a key beneficiary of the lower OPR rate, given its full exposure to floating-rate borrowings, while Axis-REIT and Sunway-REIT would also benefit.
The research house also anticipated higher quarter-on-quarter earnings for the third quarter ending Sept 30, from the OPR cut, automatic fuel adjustment discount for July to September and improving tourist numbers.
MBSB Research has only Pavilion-REIT as a “buy” recommendation with a target price of RM1.88 in its REIT coverage due to earnings prospects from several malls.
The research house has also maintained a “neutral” call on domestic REITs as they face limited upside despite stable fundamentals from the outlook for positive rental revisions.
The research house said it believes the negative performance of the KL-REIT Index in August could be due to the narrowing yield spread between the yield for 10-year Malaysian Government Securities (MGS) and REIT yields.
“The average yield of REITs under our coverage is at 4.6% which we think is unappealing,” MBSB Research said, adding that the spread between the KL-REIT Index aggregate yield and 10-year MGS yield narrowed to below 150 bps in July below its long-term average of 164 bps.
