PETALING JAYA: In a volatile market, investors seeking regular income have flocked to Malaysian real estate investment trusts (REITs) due to their attractive dividend yields. But with expectations that interest rates may remain unchanged at 3% for the rest of the year, this class of investment could lose some appeal.
“We do not expect Bank Negara to cut its current overnight policy rate (OPR) of 3% during the year; hence, we do not foresee yield seekers flocking back to REITs in a major way,” Kenanga Research said in a report, reiterating its “neutral” stance on the sector.
It noted that valuations of a few local REITs have become rich after the run-up in their share prices.
“We prefer retail REITs with malls in strategic locations, while being cautious on the office segment,” the research firm said.
Last Thursday, the central bank stayed the course in keeping the OPR unchanged at 3%. This was the seventh straight meeting that Bank Negara maintained the status quo on rates since July 2023.
The next Monetary Policy Committee (MPC) meeting will be on Sept 4 to 5 and based on the neutral tone in the latest MPC and the balance of risks, most economists are of the view that the OPR will remain at this level for 2024.
REITs, all things being equal, are generally sensitive to interest rates not unlike most dividend stocks.
RHB Research, which is also “neutral” on REITs, said that with high occupancy rates and normalised rental reversions, it prefers those with more inorganic growth prospects, especially as interest rates may have peaked at this juncture.
“For the sector as a whole, REITs remain a stronger defensive yield play in 2025 given stable economic and rental growth outlook, while the market is still waiting for the interest rate cuts to begin in the region,” the research firm said in a note to clients.
According to the research firm, the 10-year Malaysia Government Securities (MGS) yield has increased 20 basis points (bps) year-to-date, as the expectations for interest rate cuts globally have been pushed back due to persistent inflation.
“Nevertheless, the yield spread between the KL REIT Index and 10-year MGS yield has widened to 220 bps, or plus one standard deviation above the historical average from improved REITs earnings.”
For now, RHB Research said its economics team expects the bond yield to stay at 3.8% to 3.85% in the second half (2H24) and 3.65% to 3.85% in 2H25, which “at the lower end would make REITs an even better defensive play”.
The research firm said the average yield for the sector is currently at 6.1% for financial year 2025. Sunway-REIT and Axis-REIT are its top picks.
It also sees normalised distribution per unit (DPU) growth. DPU is the amount of dividends a REIT investor receives for every unit he has in the REIT.
“After being hit by higher electricity tariffs and borrowing costs last year, we do not foresee any significant risk to costs in the near term. At the same time, rental reversion growth should also be normalised for two years following the reopening of the economy, with most REITs’ management guiding for mid-single digit rental reversions.
“For the malls under our coverage, the improving tourism industry will be a key driver for retail spending and for Suria KLCC and Pavilion Kuala Lumpur specifically, this should help to offset the increased competition from The Exchange TRX.”
While the outlook for the office sector remains challenging with more offices hitting the market, RHB Research sees opportunity within the space. It said Sentral-REIT is attractive for its high dividend yield, backed by earnings that are sufficiently supported by its stronger office assets, especially following the acquisition of Menara CelcomDigi in December 2023.
Meanwhile, Kenanga Research said while the office segment will continue to be under pressure, there is demand from high-growth sectors such as technology and finance.
According to the research firm, office occupancy has been fairly maintained, standing at 72% in the first quarter of 2024 as compared to 71.9% in the preceding quarter. It said the five new office buildings, which are pending completion in 1H24, will contribute another 1.4 million sq ft to the Klang Valley’s existing cumulative office stock.
As for the retail segment, it said the 13% pay rise for most civil servants in December 2024 may partially restore consumer spending power due to inflationary pressures.
“While we are positive on REITs with malls in strategic locations, we are mindful of competition for footfall posed by new sizeable high-profile malls in an already highly saturated market.
“Two new malls within Kuala Lumpur with a collective retail space of around 1.5 million sq ft, namely, Pavilion Damansara Heights (Phase 2) and 118 Mall are scheduled for opening this year and 2H25, respectively,” it added.
