RHB Research remains cautious over office subsector as the occupancy rate in Kuala Lumpur remains low at about 70%.
PETALING JAYA: The growth of new retail space in Kuala Lumpur is expected to ease over the next two years.
This should lead to better occupancy rates, benefiting real estate investment trusts (REITs), according to RHB Research.
The research house also noted that the occupancy rates for REITs under its coverage have improved to high levels and that the respective managements are largely guiding for healthy rental revisions ahead.
Rental revisions refer to the change in rent between an expiring lease and the rent for a newly signed lease.
“We generally expect mid-single-digit rental revisions for the retail REITs under our coverage, with more upside to rental rates for Sunway REIT and IGB REIT following their major refurbishments.”
Sunway REIT is currently refurbishing Sunway Carnival Mall’s old wing to match the aesthetics of its new wing, allowing it to attract higher quality tenants.
The REIT also recently opened Sunway Pyramid’s new Oasis wing in November 2024, reconfiguring a space previously occupied by a single anchor tenant to now host over 100 smaller, higher yielding tenants.
Similarly, IGB REIT’s Midvalley Megamall now has over 20 tenants replacing a previous anchor tenant and the full impact should be felt this year.
As for the office subsector within REITs, RHB Research remains cautious as the occupancy rate in Kuala Lumpur remains low at about 70%.
This is being compounded by an increasing supply of new offices.
According to property consultants Knight Frank, one-third of the current office space is green certified and demand was largely being supported by a flight-to-quality trend with tenants relocating to newly completed Grade A offices.
“In this sub-sector, we like Sentral REIT
for its attractive high dividend yield.
“We think the downside risks to its occupancy rate in the medium term are minimal, with tenancies up for expiry mostly consisting of the REIT’s long-term tenants that are likely to continue, as well as tenancies in its in-demand flagship assets Platinum Sentral and Menara Shell. Earnings are also underpinned by a long-term tenancy at Menara CelcomDigi.
“We also highlight the upside from a potential disposal of the vacant Wisma Sentral Inai, which would result in significant interest-cost savings and further boost its dividend yield.”
Looking ahead, RHB Research foresees Malaysian REITs continuing to do well in 2025 on the back of strong fundamentals and a stable macroeconomic outlook for the country.
“While market sentiment has shifted to slower interest rate cuts in 2025, we think the downward trajectory would still be supportive of REIT valuations over the medium term,” the research house said in a note yesterday.
It also added that the REIT space has ample opportunities for inorganic growth, particularly for asset acquisitions.
It also sees opportunities for sizeable listing of new REITs which could garner more interest.
RHB Research’s top picks for the REIT sector are Axis REIT and Sunway REIT.
