Malaysian retail REITs to see light at end of tunnel

KUALA LUMPUR (Aug 12): A gradual recovery is underway in the retail industry, which is signalling Malaysian real estate investment trusts (REITs) in the retail space are set to see light at the end of the tunnel after the pandemic-induced slump.

This is the view of head of equity research at RHB Asset Management Malaysia, Petrina Chong, following channel checks and visits to malls where a pick-up in traffic football has been seen, she said, especially among those with strong market positioning like The Gardens Mall.

There are also signs of recovery in consumer sentiment, with consumers' appetite for luxury goods making a comeback, she said after observing long queues at some branded shops.

Nevertheless, the year will still be a challenging one for Malaysian REITs, though those with flagship malls with strong market positioning will be able to weather the challenges better than their second-tier peers, she said during the RHB Asset Management's “Investing in REITs: Risk or Opportunity?” webinar today. 

But city centre malls such as KLCC and Pavillion are likely to see lower footfalls despite the gradual recovery, compared to suburban flagship malls, due to the lack of tourist arrivals, she said, as border controls are still in place in many countrines around the world to curb the spread of the virulent Covid-19 virus.

This is because foreign visitors made up 20% of their daily shopper traffic, she said.

Similarly, Chong expects to see a slight recovery in the hospitality segment, one driven by local tourists.

Hotel occupancy rates have collapsed since the pandemic-driven lockdowns. According to statistics from the Malaysia Association of Hotels and RHB Asset Management Malaysia, hotel occupancy rates dropped to between 16% to 25% for the March to June period, compared to 53% to 65% in the same period last year.

Hotels are estimated to have recorded revenue losses of as much as RM930 million in April, RM596 million in March, RM435 million in May and RM537 million in June. 

As for the commercial segment, which has been dragged by an oversupply issue for years, the problem will escalate due to the pandemic, as less office space required with the rise in work from home arrangements under the new normal, as well as the streamlining of operations by businesses.

As headwinds persist, Chong expects this segment's strategy to be focused on tenant retention, with lower rental offered for older buildings.

At market close, Bursa Malaysia’s REIT index was up 0.58% or 4.87 points at 847.35, but down about 12% year-to-date, from 962.81 points. The KLCI, in contrast, is down by 2% YTD to 1,556.64 points, compared with 1,588.76 points previously.

On this, Chong said the REIT sector is among the laggards of Bursa Malaysia, as opposed to the gloves and technology sectors, which have been providing support to the benchmark index.

“Fundamentally, a lot of stocks that have done really well are at sky-high valuations now. Our team of analysts, in fact, is struggling to see if we can continue to justify those premium valuations on stocks that have done well.

“In contrast, for sectors that have not done well, we are looking whether those have already hit the bottom or reached the point where we can start to invest again,” she added.

Besides, Chong is mindful of the participation rate and sustainability of the current liquidity-driven rally. The consensus now, she added, is that retail participation will decline after the six-month loan moratorium ends in September.

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