PETALING JAYA: The removal of withholding tax on Malaysian real estate investment trusts’ (M-REITs) distribution did not result in a substantial sell-down by foreign investors.
This was despite the new tax regime being most punitive to foreign investors, said Kenanga Research in a note to clients.
“Post the removal of the preferential 10% withholding tax treatment for M-REITs for the assessment year 2026 onwards, we had anticipated for M-REIT counters to see less favour within the affected resident non-corporate investors (foreign institutional and retail investors).
“However, we had not observed any substantial sell-down by foreign REIT investors in a meaningful way.
“Provident and retirement funds will likely continue to accumulate M-REITs for their yield-seeking portfolios, given the continued tax exemption on income generated, including dividends,” added the research house.
Kenanga Research has maintained its “neutral” stance on the sector, noting that the downsides from the withholding tax removal appeared to have been adequately priced in by the market.
For perspective, the KL REIT Index has fallen by approximately 5% as of June 19, since the announcement made on March 18. At the same time, the market has recalibrated its expectations towards a more hawkish US Federal Reserve (Fed) rate decision in 2026.
This suggests limited valuation upsides for M-REITs in the near term, Kenanga Research pointed out.
“We take this opportunity to upgrade both Sunway-REIT and Pavilion-REIT from a ‘market perform’ to ‘outperform’, following recent share price corrections.
“Sunway-REIT is our preferred sector pick for this quarter.
“All in, although there is a swing in the Fed’s rate outlook in 2026, we continue to view M-REITs remaining as a safe haven in the near term amid ongoing geopolitical tensions in the Middle East.”
Meanwhile, Kenanga Research said the recent normalisation in crude oil prices could also provide some relief to business owners and the broader economy.
Within the M-REIT sector, the research house expects stable performance for office and industrial assets, while prime retail and hospitality assets in tourist hotspots may see some support from the government’s increased allocation in promoting inbound tourism.
For retail, Kenanga Research said mall occupancy remains stable.
In the first quarter of 2026 (1Q26), retail occupancy rates in shopping complexes held steady at 79% versus 4Q25 from a total retail space of 17.4 million sq m.
Office occupancy, on the other hand, has increased.
The occupancy rate for 1Q26 inched up to 72.3% from 71.9% in 4Q25, with a total private office space of 18.6 million sq m.
As for the hotel subsegment, Kenanga Research said operators under its coverage experienced a rather soft 1Q25, largely due to the surge in air ticket prices and the onset of the Middle East war since late February 2026.
“Having said that, we foresee improvements for the hotel segment in the second half of 2026.
“This is following the recent normalisation in crude oil prices, while being supported by the increased allocation for tourism in the national budget in conjunction with Visit Malaysia Year 2026 and our in-house 2026 projection of 30 million tourist arrivals in Malaysia.”
According to Kenanga Research, the key REIT proxies for hospitality and tourism exposures include Pavilion-REIT, KLCC-REIT and IGB-REIT.
