PETALING JAYA: The domestic real estate investment trusts (REITs) appear to be adequately priced in following a 14% rally in the KLREIT Index since March this year, despite some headwinds from the broadening of the sales and service tax (SST) to include leasing and rental from this July.
Kenanga Research reiterated its “neutral” stance on domestic REITs while revising the target price (TP) for Capitaland Malaysia Trust
(CLMT) to 65 sen from 70 sen but upgraded it to “outperform” from “market perform” following an estimated 11% drop in the unit price eking out 7.5% net dividend yield for the financial year ending Dec 31, 2026 (FY26).
It noted that CLMT has restated plans to continue expanding the industrial portfolio through acquisitions.
The research house has increased CLMT’s yield spread to 3.75% from 3% as debt headroom appears limited due to the gearing ratio at 43% as of the second quarter of financial year 2025, suggesting future sizeable acquisitions could involve equity fund raising.
CLMT had recently completed a placement. TPs for REITs under its coverage has been lifted by around 5% as Malaysian Government Securities yields stabilised around 3.5% from 3.75% and considering the expectation of another three US interest rate cuts.
The US Federal Reserve cut the benchmark interest rate by 25 basis points (bps) to the 4% to 4.25% range in September, while Bank Negara Malaysia cut the country’s benchmark interest by 25 bps to 2.75% this July.
Across the REITs segments, the research house sees stable mall and office occupancy and while not expecting hospitality REITs to recover strongly in the second half of FY25, it said:
“Hoteliers should be partially cushioned on the back of the increased allocation on tourism in the national budget and our in-house projection of 27.7 million tourist arrivals in Malaysia (15% increase from 2024)”.
It said the broadening of the SST scope would not affect REITs segments equally.
“Compared to the retail segment, we believe the office and industrial segments are more insulated,” it added, pointing to the lower rental-to-revenue ratios among multinational office tenants which typically have stronger financial capacity to absorb incremental costs, and the longer lease durations for industrial tenants, averaging between five to 10 years.
It cautioned that retail REITs operators may find difficulty in raising rentals should their tenants not be able to pass through the additional cost to consumers, even though the implied price rises could be minimal based on the cost structure increasing to 16.2% from 15% due to the SST.
Kenanga Research has a “market perform” call on Axis-REIT with a TP of RM1.96, an “underperform” call on IGB-REIT with a TP of RM2.5, and “market perform” calls on KLCC-REIT and Sunway-REIT at TPs of RM8.93 and RM2.22 respectively.
While it does not rate Paradigm-REIT, investors may also be interested due to its appealing prospects in Johor’s growing market and a 7% above-average net dividend yield in FY26.
Kenanga Research has a TP of RM1.10 for Paradigm-REIT.
