REITs not great alternative to cash, says Kenanga

• The retail REIT sector is facing challenges from the recent increase in the sales and service tax (SST) to 8%, weak consumer spending, sustained elevated inflation, and fuel subsidy rationalisation.

KUALA LUMPUR (July 12): Kenanga Research said real estate investment trusts (REITs) are not the best alternative to holding cash, while reiterating its 'neutral' call on the sector.

"We do not expect Bank Negara Malaysia to cut its current overnight policy rate of 3% this year. Therefore, we do not foresee yield seekers returning to REITs en masse," Kenanga said in a note on Friday.

The retail REIT sector is facing challenges from the recent increase in the sales and service tax (SST) to 8%, weak consumer spending, sustained elevated inflation, and fuel subsidy rationalisation.

However, these are partially cushioned by the impending 13% pay rise for most civil servants, the deferment of the luxury goods tax, and the return of international tourists.

"We prefer retail REITs with malls in strategic locations, while remaining cautious about the office segment," said Kenanga.

The house's top sector picks are KLCC Real Estate Investment Trust (KL:KLCC), with an 'outperform' rating and a target price (TP) of RM8, and Pavilion REIT (KL:PAVREIT), with an 'outperform' call and a TP of RM1.59.

Weak consumer spending is a concern, but the recent pay rise for civil servants could partially restore their spending power.

Kenanga also noted that two new malls are set to open this year and in the second half of 2025 (2H2025), including Pavilion Damansara Heights (Phase 2) and 118 Mall.

These new entries follow the opening of The Exchange TRX and Pavilion Damansara Heights (Phase 1) in 2H2023.

Retail occupancy rates have been maintained, with a slight increase in rental rates. In the first quarter of 2024 (1Q2024), retail occupancy rates were 77.6%, up from 76.4% in 4Q2023.

Rental rates among retail REITs have increased by about 3% year-on-year.

The office market is also seeing new developments.

Five new office buildings were set to be completed in 1H2024, adding approximately 1.4 million sq ft of space to the Klang Valley’s existing stock. These included Felcra Tower and The Exchange TRX office by Lendlease.

Despite these new additions, office occupancy and rental rates have been fairly maintained.

To note, 1Q2024 saw an occupancy rate of 72%, slightly up from 71.9% in the preceding quarter. High-growth sectors like technology and finance are driving demand for office spaces, but the market remains imbalanced.

Given the current market conditions, Kenanga downgraded its calls for CapitaLand Malaysia Trust (KL:CLMT) to 'underperform' (from market perform) and Sunway REIT (KL:SUNREIT) to 'market perform' (from outperform), due to rich valuations after recent share price increases.

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