HLIB Research said REITs with hospitality assets will remain robust as tourist arrivals are expected to remain strong this year.
PETALING JAYA: The real estate investment trust (REIT) sector is looking upbeat this year as a positive recovery in travel is expected to bode well for it.
Hong Leong Investment Bank (HLIB) Research said it is retaining its “neutral” call on the sector as it commands an overall balanced risk-to-reward profile with a preference for retail REITs.
HLIB chose Sunway-REIT and Pavilion-REIT as its top picks.
The research house said even with a potential slowdown in domestic demand, tourist arrivals will counter this.
It added REITs with hospitality assets will remain robust as tourist arrivals are expected to remain strong this year.
For the first nine months of 2023, 14 million tourists arrivals contributed RM49bil in receipts to the local economy.
This further prompted the government to increase its target to 18 million tourists in 2023, and HLIB Research said it expected the target to be surpassed.
“Given the announcement of visa-free travel for tourists from China and India effective December last year and traditionally higher tourist arrivals around the year-end, we believe not only will retail activity be sustained on the back of increasing tourist arrivals, but hotel operators will also see further improvement in terms of higher hotel occupancy,” the research house said.
As for the office space, HLIB said it is likely to retain the status quo as more office supply enters the market in 2024, notably the Merdeka 118 tower.
“Flight to quality in Grade A green-rated offices will continue to remain in focus, as more tenants with global mandates increasingly pay higher emphasis on environmental, social and governance matters.
“Given that the oversupply of office space continues to be unresolved, rental reversion is also expected to remain muted for the time being,” it said.
According to HLIB Research, the Klang Valley will see additional retail supply from the launch of Warisan Merdeka Mall and the second phase of Pavilion Damansara Heights, which could pressure occupancy and rental rates for shopping malls.
Despite consumers being more prudent with their spending, HLIB Research said the impact on prime malls such as Pavilion KL, Suria KLCC, Mid Valley and Sunway Pyramid would be relatively negligible as these malls cater to a more affluent consumer market that can afford higher prices for goods and services.
It is optimistic on the long-term prospects of industrial property, especially for manufacturing, based on impetus from the New Industrial Master Plan 2030 and the China+1 strategy as manufacturers trim their dependence on China and the expansion of the eCommerce market.
HLIB Research noted the REIT sector will be minimally affected by the high-value goods tax that takes effect in May 2024.
“As tenants’ profit sharing is less than 10% of malls’ total revenue and consumers of these luxury goods are relatively less price sensitive, we think the impact will be small,” the research house said.
UOB Kay Hian Research (UOBKH) Research said it will maintain its “market weight” call on REITs, with Sunway-REIT and Pavilion-REIT as its top picks.
UOBKH Research said it expected companies under its coverage to register 8.6% growth, supported by resilient retail spending, low-to-mid single-digit retail reversion and higher hotel revenue contribution, which could offset the expected negative office rental reversion.
The research house said the office segment is likely to continue experiencing headwinds from oversupply, particularly in the city centre.
“The Tun Razak Exchange, Bukit Bintang City Centre and Merdeka 118 will add about 3.5 million sq ft of space to the Klang Valley’s existing cumulative office stock. We expect rental reversion to remain flattish, regardless of location, except for resilient transport hub KL Sentral,” it said.
The research house said it expects 2024 earnings to grow at a slower rate of 5.5% year-on-year (y-o-y) due to inflationary pressure but expects other costs like staff and marketing to remain high.
In terms of dividends, UOBKH Research expects companies under its coverage to post dividend growth of 4.7% y-o-y in 2024, which will translate to an average dividend yield of 6.6%.
Furthermore, UOBKH Research said for the third quarter of 2023, the sector average net profit grew 8% quarter-on-quarter and 7% y-o-y, boosted by robust hotel performance and higher retail sales.
“Prime malls like the Mid Valley Megamall, Pavilion KL and Sunway Pyramid saw better rental reversion and occupancy rates. The fourth quarter should see higher revenue and net profit on a seasonally stronger quarter, contributed by higher turnover rent from the festive season,” it said.
However, new developments including The Exchange TRX and Merdeka 118 will put pressure on rental reversion in the retail space in the longer term.
“However, in the short term, we anticipate earnings to remain resilient, given sustained high-occupancy rates,” it said.
The research house said it preferred prime malls for their resiliency, followed by industrial REITs as eCommerce and logistics companies continue to grow, thus driving demand for industrial properties.
“One thing to look out for in 2024 is additional supply of net lettable area which would keep rental rates depressed. Other than that, we think inflationary pressure should remain from various new taxes and subsidy rationalisation,” the research house noted.
