The positive outlook for Real Estate Investment Trusts (REITs) is driven by optimistic projections for retail, hospitality, and industrial assets in prime locations. This comes despite a flat Overnight Policy Rate (OPR), as Malaysian Government Securities (MGS) yields are expected to decrease further. The current spread between sector yields and MGS yields is now considered attractive, prompting a reassessment of target yields and valuations. In light of this, PAVREIT and SUNREIT have emerged as top picks, with target prices set at RM1.66 and RM1.77 respectively, replacing KLCC which has been impacted by recent share price movements. Analysts have upgraded their sector call on REITs from Neutral to OVERWEIGHT.
The retail sector remains vibrant, bolstered by a surge in tourist arrivals and robust rental reversions. The Malaysian government anticipates welcoming 27 million tourists in 2024, a significant increase from 20 million in 2023. High-profile assets in prime locations, such as Suria KLCC and Pavilion KL, are benefiting from this influx. Retail spaces in Klang Valley and Penang are thriving, with malls like Sunway Pyramid and Gurney Plaza reporting strong rental revenue growth. However, REITs focused on retail are keeping a cautious eye on potential market headwinds, including proposed government policies and the luxury tax.
The industrial sector is showing strong performance, particularly in Johor, driven by data centre investments and substantial foreign direct investment (FDI) inflows. AXREIT, a key player in this sector, is nearing full occupancy for its industrial assets, with significant rental reversions in Johor. Meanwhile, CLMT is expanding into the industrial sector as part of its growth strategy.
In the office space segment, despite an oversupply in many areas, locations such as the KL Fringe and Petaling Jaya are seeing resilient demand due to their affordability compared to KL city centre. Sentral REIT is benefiting from high occupancy rates in its office buildings outside of the city centre.
As MGS yields decline, from a peak of 4.57% in October 2022 to a current 3.75%, analysts have recalibrated target yields for REITs. CLMT and IGBREIT are highlighted for better valuations due to lower earnings risk and higher stability in mid-range malls. The MGS yield is expected to decrease further to around 3.6%, aligning with historical averages. This recalibration reflects a more favourable outlook for certain REITs, reinforcing the sector's attractiveness for yield-seeking investors.