Malaysian Reits’ dividend yield may be higher than MGS yields, and as such this would make M-REITs more compelling than bonds.
PETALING JAYA: The domestic real estate investment trust (M-REITs) market is expected to be subdued as uncertainty over the withholding tax (WHT) concession overshadows any potential boost from regional capital inflows driven by an easing US dollar carry advantage.
iFAST Capital research analyst Kevin Khaw Khai Sheng said while the rotation of fund flows back into Asia could help elevate investors’ interest into these REITs, the WHT issue remains a key overhang for the sector.
“While Malaysian REITs may see some improvement in interest due to regional fund flows, the tax uncertainty is likely to cap their appeal.
“Moreover, for foreign investors looking to invest in Malaysia, REITs are not their only option.
“They may also prefer other domestically driven sectors such as banking, construction, or consumer-related stocks,” he told StarBiz, adding that he has a neutral to bearish view on M-REITs.
Under the current year of assessment 2016 (YA16) to YA25 structure, most investors enjoy a 10% final WHT, while resident corporations face 0%, and non-resident corporations taxed at 24% on REIT distributions.
The concession expired on Dec 31, 2025 with no indication of a renewal for YA26.
Maybank Investment Bank Research said REIT distributions to affected investors would revert to their respective marginal income tax rates, potentially reducing post-tax yields by 50 to 100 basis points (bps) without the extension.
This would weigh on net returns for retail and institutional yield-seeking investors and erode the relative appeal of Malaysian REITs against regional peers, and deter foreign investors, despite the sector’s current dividend yield of about 5.7%.
Meanwhile, the market expects the US Federal Reserve (Fed) to continue cutting interest rates next year.
The Fed’s own forecast expects one cut next year, while the market has priced in just under one rate cut by April and another one later in 2026.
The Fed cut its benchmark rate by 25 bps to a target range of 3.50% to 3.75% at its December 2025 meeting, and is widely expected to leave rates unchanged when policymakers meet on Jan 27 to Jan 28.
Further Fed easing in 2026, declining foreign exchange hedging costs and renewed unwinding of yen-funded carry trades are expected to pressure the US dollar, eroding the US carry advantage.
That is likely to drive incremental flows into safer or higher-yielding Asian markets as elevated US term premia undermine the appeal of US dollar assets.
The US dollar Index (DXY) have been trading largely below the 100-point level – a key psychological benchmark – since late May 2025.
The index stood at 98.28 at press time and is down nearly 10% year-to-date over the past year.
On the domestic front, Khaw expects Bank Negara Malaysia (BNM) to deliver one rate cut next year as a preemptive measure amidst lingering global growth uncertainties.
Taken together with the Fed’s cuts, he said this suggests that Malaysian Governemnt Securities (MGS) yields may gradually trend lower.
On a relative basis, Malaysian Reits’ dividend yield may be higher than MGS yields, and as such this would make M-REITs more compelling than bonds.
“Nonetheless, REITs are not the only asset class that can provide this kind of dividend yield.
“Banks, for instance, can offer dividend yields of around 4% to 6%, and in some cases – such as Affin Bank and Alliance Bank – yields can exceed 7% to 8%.
“For investors seeking capital growth, sectors such as consumer and construction also offer alternative opportunities.
“Hence, while the expected compression in bond yields could improve the relative attractiveness of REITs, we believe the REIT sector will continue to see headwinds,” Khaw said.
The 10-year MGS yield has declined by more than 30 bps last year, with the drop accelerating after Trump’s tariff announcement in April, coupled with BNM’s 25 bps rate cut in July 2025.
The 10-year MGS yield stood at 3.53% as of late December 2025.
The yield spread between the 10-year MGS and M-REITs narrowed to 127 bps in December 2025 from 141 bps in November 2025, below the long-term spread of 163 bps.
Meanwhile, Tradeview Capital fund manager Neoh Jia Man said support from the expected capital inflows due to the easing US dollar carry advantage is limited for M-REITs, unless they are accompanied by an additional rate cut by BNM.
“Unless these inflows can meaningfully lower MGS yields, M-REITs valuations are likely to remain stagnant,” he said.
Neoh said apart from the WHT issue, M-REITs are also contending with the sales and service tax expansion last year that also affects the rental that their tenants have to pay.
This, he said, will slow down the REITs ability to increase rental rates in the next one to two years.
“The outlook of M-REITs remains muted.
“Should the WHT not be extended, if a REIT is offering a gross yield of around 5%, the effective yield received by investors could fall to about 4.5% or lower after tax. This is quite significant.
“In terms of segments, we are still optimistic on industrial REITs because the demand for industrial property is still strong,” he said.
