REITs can get it right

AS interest rates in Malaysia have normalised and stabilised, albeit at an “elevated level” following the tightening cycle, listed real estate investment trusts (REITs) are now focusing on capital discipline, cash-flow visibility and asset quality.

While borrowing costs remain higher than the ultra-low levels of the lockdown years, there is no fear of near-term rate volatility. This has shifted investor focus toward balance-sheet resilience, refinancing profiles and the sustainability of distributions.

Paradigm-REIT is a prime example of this change in approach.

With its borrowings fully locked in at fixed rates and no refinancing requirements in the near term, the retail-focused REIT says it has been able to concentrate on operational execution – from tenant mix optimisation to rental renewals – rather than managing funding risk.

In an exclusive email interview with StarBiz 7, the investment manager says interest rates remain “elevated” but it is deliberate about keeping its capital structure prudent, particularly since it does not have borrowings that need to be refinanced in the next 12 to 24 months.

“Our debt is entirely in fixed-rate medium-term notes (MTNs), totalling RM845mil, and the maturity profile is long-dated and staggered. The earliest expected maturity is June 2030,” Paradigm-REIT reveals.

Because the MTNs are fixed-rate, the investment trust says its cost of funds is also relatively stable, with coupons of 3.82% to 4.25% per annum, or approximately 4% on a weighted basis, giving it good visibility on funding costs.

On leverage, Paradigm-REIT is still prudent with debt-to-total asset value at 32.4%, which it says gives it comfortable headroom versus the 50% regulatory limit.

“Overall, this structure supports distribution sustainability and keeps us focused on operational delivery and cash earnings, rather than being forced into refinancing decisions in an unfavourable rate window.

“It also means we can gear up for acquisitions if the opportunity is beneficial for the REIT and for unitholders.”

Distribution outlook for 2026

A property analyst from a foreign research house is expecting retail REIT distributions to be broadly stable throughout the year, with modest upside for REITs that can deliver positive rental reversions or improve occupancy.

“Higher financing costs are largely embedded, so distribution growth will depend more on operational execution rather than financial engineering,” she says.

“Dominant retail REITs with strong tenant demand and asset relevance, together with industrial or logistics REITs with long leases, built-in rental step-ups and resilient tenants should be able to defend, and in some cases grow, distributions.”

The analyst points out that while funding costs are higher than during the lockdown, the stabilisation of interest rates has reduced near-term refinancing risk.

REITs with a higher proportion of fixed-rate or long-dated debt are better insulated, while those relying on short-term facilities remain more sensitive to changes in credit spreads, she says.

Paradigm-REIT, on its part, is also determined to maintain its distribution level of financial year 2025 (FY25), although it sees room to improve if the operating environment is favourable for FY26.

Last year, the investment manager declared a distribution of 4.1 sen per unit, as net profit stood at RM89.5mil.

“For FY26 rental income, our view is driven by execution on renewals, rent quality and tenant mix. Paradigm Mall Johor Baru (PMJB) and Paradigm Mall Petaling Jaya (PMPJ) have a shorter weighted average lease expiry, so FY26 naturally comes with a higher renewal cadence,” it says.

At the same time, the trust is also refining its tenant mix to support tenant sales, in line with its strategy to keep the malls relevant.

“On rental reversions, we are encouraged, with PMJB running above 20% and PMPJ in the high single-digit range, but our approach remains commercially sustainable so that rents work for tenants and support long-term cash flow,” Paradigm-REIT reports.

Occupancy and tenant health

The property analyst believes occupancy and tenant health across the Malaysian REIT sector are increasingly diverging by asset quality and location rather than moving in a single direction.

For dominant retail REITs with strong catchment areas, she observes that occupancy remains high – typically in the mid-to-high 90% range – supported by steady footfall and resilient tenant sales.

“While tenants remain disciplined on occupancy costs, these landlords continue to achieve positive rental reversions, particularly where sales productivity justifies higher rents,” she highlights.

Retail REITs with non-dominant or secondary malls ­generally see stable occupancy but face weaker pricing power, as leasing strategies in these assets rely more on incentives, flexible lease structures and tenant mix adjustments to maintain footfall and minimise downtime, she says.

Industrial and logistics REITs, meanwhile, continue to enjoy very high occupancy levels, underpinned by long-term leases and stable tenant demand.

“Rental growth in this segment is typically modest but predictable, often driven by contractual step-ups rather than market repricing,” she notes.

Office REITs, however, present a more bifurcated picture, with prime, well-located assets having maintained relatively stable occupancy, while older or secondary buildings face structural pressure as tenants favour quality, efficiency and flexibility.

“Hospitality REITs are seeing improving occupancy on the back of tourism recovery, but earnings remain more volatile and sensitive to travel demand and room-rate trends,” she says.

From an industry perspective, Paradigm-REIT reveals that over the last 12 months, there has been continued strength in occupancy and leasing interest across its malls.

“Currently, our malls are almost fully occupied. Therefore, our focus in FY26 is on improving rental rates and continuing to enhance the tenant mix.

“In PMJB, the next major milestone is the bulk renewal cycle in November, where about 57% of the mall is due for renewal. To-date, most renewals have been executed at higher rental rates,” says the investment manager.

Paradigm-REIT says it is prioritising sustainable rents while supporting footfall and tenant sales.

Sunway-REIT is similarly hopeful, observing that even though Malaysia’s economic growth is forecast to be moderate, it will remain resilient, growing at 4% to 4.5% in 2026 aided by robust domestic consumption, ongoing infrastructure activities, and strong tourist arrival spurred by Visit Malaysia 2026.

“This will continue to sustain demand for logistics and ­industrial space, and high retail and hotel occupancy rates.

“Despite pockets of office oversupply, the recent refinements to the sales and service tax (SST) framework, including the reduction in the service tax rate on rental income from 8% to 6%, are expected to provide some cost relief to tenants and support occupancy,” said the investment trust.

Sunway-REIT is fully expecting Malaysian REITs to deliver stable to modestly positive performance in 2026, despite some uncertainties arising from the expiry of the 10% withholding tax concession on income distribution from local REITs on Dec 31 last year.

“A stable interest-rate environment will also help buoy interest in Malaysian REITs as a defensive income asset play in 2026,” it adds.

Citing the 4% retail sales growth forecast by Retail Group Malaysia for this year, Sunway-REIT says it is staying confident on the prospects of its retail segment in 2026, backed by high mall occupancies and positive rental reversions.