PETALING JAYA: The recent run-up in the share price of real estate investment trusts (REITs) coupled with the hunt for tenants in specific segments of the market are prompting a re-evaluation of the universe of REITs on the radar of analysts.
Analysts at Kenanga Research and HLIB Research said they would be employing a stock-picking strategy given the lofty valuations of REITs under their scope.
Noting that it still continues to see opportunities in certain REITs, Kenanga Research said the potential value to be extracted has been moderately priced in by the market following its previous “outperform” calls on big-cap REITs such as KLCC REIT and Sunway REIT, where prices have risen 3% to 12% over the past three months.
Kenanga Research has also downgraded REITs to “neutral” from “overweight” but continues to recommend Sunway REIT as its top pick due to earnings catalysts such as the opening of Sunway Pyramid’s Oasis wing where tenants pay significantly higher rates and an additional 200,000 sq ft of space in Sunway Carnival Mall to be added by the first-half of this year.
“We are also positive on Pavilion REIT as its crown jewel, Pavilion KL, continues to demonstrate resilience in sustaining strong footfalls even after the debut of rival TRX mall. Meanwhile, we believe the recent share price weakness in Capitaland Malaysia Trust
is unwarranted, presenting an opportunity for investors to accumulate,” it added.
It expects strong recovery ahead for the hospitality segment while noting that occupancy and rental rates in the office segment have been fairly maintained. “Besides seeing growing demand for office spaces from high-growth sectors such as technology and finance, we believe offices at the fringe of Kuala Lumpur and Selangor that are highly integrated are in a better position as compared with Kuala Lumpur city as affordability remains a key concern for Malaysian corporations,” it added.
For HLIB Research, which has maintained a “neutral” call on REITs, the office segment faces persistent vacancy challenges with limited rental growth given the oversupply and an elevated vacancy rate of 33% as of third quarter ended Sept 30, 2024 (3Q24). It pointed out that a projected slowdown in the incoming supply of office space in the greater Kuala Lumpur area may offer some respite going forward.
“Also, demand recovery remains sluggish and it struggles to absorb new supply in Klang Valley, leaving office owners with minimal rental upside and negative rental reversion risk in 2025. From our channel checks, rental reversion is expected to stay flattish, underscoring the subdued outlook.
On a selective basis, HLIB Research picks Axis REIT in the industrial segment for its solid track record, strong tenant base across its diversified portfolio, and robust acquisition pipeline. “Conversely, we remain cautious on office REITs due to persistent oversupply and flat rental reversion expectations,” it said.
