PETALING JAYA: Malaysian real estate investment trusts (REITs) are facing uncertainty due to an expiring tax concession, which presents an “overhang” to the sector, analysts say.
UOB Kay Hian Research (UOBKH Research) said in a report yesterday the primary concern is the potential changes to the 10% concession on withholding taxes for REIT income distributions.
The concession was initially introduced in Budget 2009 as a temporary measure to enhance the attractiveness of REITs at an early stage of development, reducing the withholding tax from 20% to 10% for foreign institutional investors and from 15% to 10% for non-corporate investors.
The last extension of the concession had been until Dec 31, last year.
If the concession is not extended, the withholding tax rates would revert to significantly higher pre-concession statutory levels of 20% and 15%, with a one percentage point change in the withholding tax potentially impacting unitholders’ net yields by five to eight basis points (bps), said UOBKH Research.
In a worst-case scenario, this would imply a 25bps to 80bps reduction in net yields, the research house added.
While, the Malaysian REIT Managers Association is engaging the Finance Ministry on a renewal of the concession, the research house said it believes a full reversion of the concession is less likely, given the narrowing sector yield and the need to remain competitive against regional peers such as Singapore.
Despite the tax concerns, the research house said the outlook for specific segments remains optimistic, driven by government initiatives and growing retail vibrancy from Visit Malaysia 2026 (VM26) and meetings, incentives, conferences and exhibitions (MICE) events .
Another positive development is the partial rollback of the sales and service tax on rental and leasing services from 8% to 6%, effective Jan 1, this year.
UOBKH Research added that the VM26 tourism campaign is also a major catalyst, boding well for malls and hotels near tourist attractions.
It said that Malaysia had been on track to achieve its visitor-arrivals target of 45 million for last year, although the final numbers have not been announced yet.
The target for the VM26 campaing is 47 million visitor arrivals.
The research house highlighted Pavilion-REIT and KLCC Stapled Group (KLCCSS) as key beneficiaries. It said Pavilion-REIT, with its flagship Pavilion KL Mall and recent hotel acquisitions, is well-positioned to capitalise on the influx of tourists.
UOBKH Research said that healthier and recurring MICE cycle should continue to support both hospitality and retail assets across KLCCSS and Pavilion-REIT this year.
Meanwhile, the industrial sector provides stability for REITs, underpinned by resilient demand for logistics and warehousing space, with both Axis-REIT (AXRB) and Capitaland Malaysia Trust
(CLMT) actively evaluating “yield-accretive industrial opportunities”.
The research outfit said CLMT is aiming to grow its logistics and industrial exposure to 20% of assets under management by 2028.
Overall, UOBKH Research is maintaining a “market weight” recommendation on REITs, with a cautiously optimistic outlook for this year. The firm’s top picks are CLMT, Pavilion-REIT, and Axis-REIT.
