PETALING JAYA: Kenanga Research has upgraded its recommendation on the real estate investment trust (REIT) sector from “neutral” to “overweight”, citing a positive outlook and attractive valuations.
The upgrade was based on two primary factors.
First, the research house said ground and channel checks have confirmed a positive outlook for REITs involved in retail, hospitality assets, and industrial properties, especially in prime regions.
Second, despite a flat overnight policy rate, a further decline in Malaysian Government Securities (MGS) yields had made the sector’s yield spread more appealing, signalling potential value for investors.
Kenanga Research has recalibrated its target yields and valuations, reflecting the ability of individual REITs to adapt to market changes and potential luxury tax impacts.
“REITs have now emerged to be a sound consideration for yield-seeking and long-term investors with average yields of between 5.5% and 6.5% remaining the cream of the crop within our coverage supported by stable projected earnings growth,” it said in a report.
On the retail lens, Kenanga Research said most REITs managers remain buoyant, driven by a steady influx of tourists and promising rental reversions.
“The government is expecting to welcome 27 million tourists in 2024, up from 20 million in 2023.
“Notable assets in prime locations are seeing stronger spillover from tourist arrivals such as Suria KLCC, Pavilion KL, and Sunway Hotels,” Kenanga Research noted.
Apart from Klang Valley, it said that retail malls in Penang such as Gurney Plaza, Queensbay Mall and Sunway Carnival had been recording strong growth in rental revenue since the beginning of the year, given the robust business activities that stimulate retail spending in the northern part of Malaysia.
However, it said retail-centric REITs are closely monitoring potential challenges, such as further subsidy rationalisation and the luxury tax which erodes affordability of premium offerings in upscale malls.
As for the industrial sector, the research firm said it is thriving, evident by the 5.3% increase in Malaysia’s industrial production index in July.
“Particularly in Johor, it is largely driven by the data centre investments with strong foreign direct investment inflows,” it added.
It said its industrial-centric coverage, Axis-REIT, is approaching near to full occupancy for its industrial assets secured by longer-leasing assets, with double-digit rental reversion in its Johor asset which accounts for one third of its portfolio.
Meanwhile, despite the ongoing oversupply issues in the office sector, Kenanga Research said certain areas are maintaining resilient demand.
“Well-integrated areas such as the KL Fringe, Bangsar South, and Petaling Jaya continue to see resilient demand thanks to higher affordability compared with Kuala Lumpur city,” it noted.
For example, it said Sentral-REIT is experiencing high occupancy rates in its office buildings outside of the KL city centre.
Kenanga Research’s optimistic outlook for the REIT sector is reflected in its adjustment of the MGS yield.
The 10-year MGS yield, which serves as a key benchmark for valuation, has decreased from its peak of 4.57% in October 2022.
“Given continuous net foreign inflows into the Malaysian bond market, coupled with the anticipation of a US Federal Reserve rate cut soon, MGS has declined to 3.75%,” it noted.
The research house expects the yield to further decrease to around 3.6%, “which would still be fairly in line with historical averages pre-pandemic.”
In light of the decline, Kenanga Research has recalibrated its MGS yield in its valuation model to 3.75% from 4.0%.
