PETALING JAYA: Malaysia’s real estate investment trust (M-REIT) sector is facing a tougher environment as analysts warn that the asset class is losing some of its relative appeal amid rising competition from alternative income-generating investments.
Hong Leong Investment Bank (HLIB) Research has downgraded the sector to “neutral” from “overweight”.
It said the pressure stems from investors increasingly comparing REIT yields with other domestic assets such as banking stocks, bonds and fixed-income instruments, many of which now offer more attractive post-tax returns.
The downgrade follows the cessation of the flat 10% withholding tax concession on March 18, which has reduced net yields for foreign and non-individual investors.
“Within equities, sectors such as banking offer post-tax yields of 5% to 5.5% in the calendar year 2026 to 2027, exceeding those of M-REITs following the recent increase in withholding tax,” it said.
“This relative yield disadvantage is further accentuated by more favourable tax treatment in regional peers such as Singapore, where REIT distributions are exempt for individuals (subject to 10% withholding tax for certain non-resident investors) and taxed at a 17% corporate rate for resident companies (with key concessions extended to Dec 31, 2030).”
The research house added that this policy shift has forced a valuation reset across the sector, as REIT prices need to adjust lower to restore investor return thresholds.
The impact was immediate, with the KL-REIT Index falling as much as 8.2% after the announcement before recovering partly to a net decline of 3.2%, reflecting weaker sentiment.
According to HLIB Research, this tax change has compressed post-tax yields and triggered what it described as a sector “de-rating”.
However, an analyst with a bank-backed research house said that with the confirmation of the cessation of the withholding tax concession, the KL-REIT de-rating following the announcement has more than compensated for the removal of the 10% concessionary rate.
The analyst pointed out that sector dividend yields are up 10%, broadly offsetting the anticipated 50 basis points (bps) to 100 bps initial compression in net yields.
Nevertheless, HLIB Research believes that adding to the headwinds is the prospect of firmer interest rates.
While the research house’s base case assumes the overnight policy rate remains at 2.75% this year, it said investor expectations have turned more cautious due to inflation risks linked to geopolitical tensions, especially the conflict involving Iran.
Furthermore, Malaysia’s 10-year government bond yield has already edged up from 3.5% to 3.6%, narrowing the spread between REIT yields and risk-free returns.
“Higher risk-free rates are negative for REITs, as they compress yield spreads and weaken the sector’s relative attractiveness,” the research house said.
Despite softer sentiment, HLIB Research believes operating fundamentals remain intact, supported by rental reversions, acquisitions and asset recycling.
However, it cautioned that rising tenant operating costs could limit rental upside, especially for retail and office assets where lease renewals are more frequent.
Among its preferred names, Pavilion-REIT remains the top pick, backed by stronger tourism-driven footfall at Pavilion Kuala Lumpur and Pavilion Elite, while Axis-REIT is favoured for its acquisition pipeline and Johor exposure linked to the Johor-Singapore Special Economic Zone theme.
HLIB Research also upgraded IGB Commercial-REIT to “buy” after its recent unit price weakness while downgrading Sunway-REIT to “hold” on valuation grounds.
