PETALING JAYA: The removal of the 10% withholding tax for the 2026 tax assessment year for Malaysian real estate investment trusts (M-REITs) from April 1, will not see an investor sell-down of M-REITS.
Hong Leong Investment Bank (HLIB) Research did not expect a sustained or disorderly sell-down, particularly among long-term unitholders, of M-REITs as absolute yields remained attractive.
“For instance, investors who accumulated Sunway-REIT and IGB-REIT around March 2022 at unit prices of RM1.05 and RM1.50, respectively, would still be generating financial year ended Dec 31, 2025 (FY25) gross yields of 13.8% and 7.8% based on declared distributions of 14.48 sen and 11.75 sen,” it said.
“Even after factoring in higher tax rates, minimum net yields would remain at 10.0% and 5.5%, which we believe remain within an acceptable range for long-term investors,” it added.
It has maintained an “overweight” call on M-REITs, with Pavilion-REIT and Axis-REIT being the top picks, with target price (TP) of RM2.02 and RM2.25, respectively while upgrading Sunway Reit to a “buy” call with an unchanged TP of RM2.52 after a recent price correction.
Valuation-wise, the research house had maintained targeted yield assumptions reflecting investors having fully adjusted to the prevailing tax regime, although there could be some short-term volatility and valuation dispersion across various REITs.
“While the tax increase has reduced after-tax returns and triggered near-term downward repricing in unit prices, we expect the market to recalibrate over time, with yields adjusting to levels that restore investor demand,” it said.
Kenanga Research has maintained a “neutral” stance but revised the TP lower for most of the REITs under its coverage.
It has upgraded IGB-REIT to “market perform” from “underperform” but at a lower TP of RM2.50 from RM2.52, following a 13% price correction from last month’s peak.
It has also shifted the valuation matrix to gross dividend per unit (DPU) from net DPU with the new tax framework and widening the yield spread to reflect the lower expected net dividend.
“All in all, we are increasing our target yields by about 10% to 15% accordingly based on the previous ascribed target yield,” the research house said.
Both HLIB Research and Kenanga Research pointed out that individual investors with lower income thresholds would benefit from the removal of the withholding tax.
“Individuals such as retirees whose tax brackets are lower than 10% may stand to benefit from the new framework compared with the previous regime, which applied a flat 10% withholding tax across the board,” Kenanga Research said.
“Overall, the removal of the concessional withholding tax regime reduces the relative tax attractiveness of M-REITs, particularly for foreign investors while increasing complexity and variability in after-tax yields depending on investor profiles,” the research house said, pointing out that M-REITs with higher foreign shareholdings include Axis-REIT at 19% and Sunway-REIT at 12%.
