PETALING JAYA: Despite macroeconomic headwinds and the recent rise in 10-year Malaysian Government Securities (MGS) yields, domestic real estate investment trusts (REITs) continue to have visible dividend per unit growth and identifiable earnings catalysts going into 2027, says RHB Research.
The research house has maintained an “overweight” call on Malaysian REITs (M-REITs), with both top picks Axis-REIT and Pavilion-REIT having “buy” calls and target prices of RM2.44 and RM2.18 respectively.
It noted that Malaysian REITs continue to have healthy underlying fundamentals as occupancy rates, rental reversions and earnings visibility remain intact, with the de-rating largely valuation driven.
It expects REITs’ upcoming third quarter of financial year 2026 (3Q26) earnings to improve sequentially, with the retail segment to normalise from the seasonally softer 2Q26 supported by resilient tenant sales and continued positive rental reversions.
“Meanwhile, the office segment should benefit from gradual occupancy improvement and contributions from recently backfilled space, although the leasing momentum remains asset specific.
“Industrial earnings should remain supported by lease-up, positive rental reversions and fuller contributions from acquisitions completed over the past few quarters,” it said.
The research house noted that the near-term drag should be net property income (NPI) margin normalisation rather than weaker leasing fundamentals.
The shift in automatic fuel adjustment from rebates to surcharges since May has increased utility costs, particularly for retail and office assets, partly offsetting rental growth.
“We expect this to result in a slight (100 basis points or bps to 200 bps) NPI margin compression across retail and office-heavy REITs. Industrial REITs should remain relatively insulated, given their predominantly triple net lease structures.”
It said growth visibility should improve further in 4Q26, with industrial REITs to benefit from fuller acquisition contributions and ongoing lease-up, with Axis-REITs expecting few remaining acquisitions to be completed by 4Q26, providing incremental earnings into 2027.
The retail and hospitality segments should benefit from the seasonally stronger year-end period and incremental income from completed asset enhancements, including Pavilion-REIT’s Pavilion KL Phase 1 reconfiguration (expected to progressively reopen from November), while KLCCP Stapled Group should begin seeing contributions from the first batch of its refurbished Mandarin Oriental serviced apartments.
“Office fundamentals should remain bifurcated – we think occupancy at prime, transit-orientated and integrated developments should remain relatively resilient, while standalone buildings with larger vacancy pockets may continue to face longer backfilling periods,” it said.
With the overnight policy rate (OPR) maintained at 2.75% and the yield spread between the Bursa Malaysia REIT Index and MGS 10-year yield at around 230 bps, funding cost pressure remains manageable, while the recent rise in longer tenure Kuala Lumpur Interbank Offered Rate (KLIBOR) has had a limited impact on floating-rate borrowing costs so far.
“In our view, this suggests that REIT yields have repriced sufficiently to preserve an attractive relative valuation buffer despite the higher risk-free rate.
“We, therefore, see the recent de-rating as largely valuation driven, rather than a deterioration in property fundamentals,” it said.
“While the recent rise in the three-month and six-month KLIBOR has raised concerns that floating-rate debt costs could increase even with the OPR unchanged, our checks indicate that most floating-rate facilities among the REITs under coverage are referenced to the one-month KLIBOR, which has seen a much smaller increase,” it said.
“As such, the rise in longer-tenure KLIBOR has not yet translated into a meaningful increase in REIT financing costs.
“While RHB Economics expects a 25 bps OPR hike in the first half of financial year 2027, we expect near-term funding-cost pressure to remain manageable,” it said.
