Retail sales is expected to recover in 2024 after slower than expected growth in 2023. To recap, the Retail Group Malaysia (RGM) was expecting a growth rate of 3.5% for the industry in 2023 earlier this year but subsequently revised it to 2.7% (and tweaked upward to 2.8% recently after latest November industry report). The actual retail sales registered was 2.2% in 2023, which came in below expectations. Broadly however, shopping traffic in 4Q23 was flat when compared to 4Q22 according to RGM. While Malaysian consumers continued to spend, holiday sales were not the same as pre-COVID levels, due to the shortened school holiday.

For 2024, higher food prices and higher operation costs will remain the struggles for food-and-beverage operators in Malaysia. The weak ringgit is raising costs of raw materials and food ingredients. RGM reported that despite the Chinese New Year festival and higher tourist activities, cafe and restaurant operators are anticipating their businesses to ease 2.9% YoY in 1Q24. Malaysia’s retail sector recorded a better-than-expected growth rate of 7.8% in retail sales, as compared to the same period in 2023, according to the latest report from RGM. The robust growth was fuelled by various factors including the Chinese New Year festivities, extended school holidays from February to March, and the beginning of Ramadan on March 12. However, RGM believes that challenges persisted due to rising food prices and global geopolitical tensions, which led to boycotts of certain international brands, affecting market dynamics.

Rental reversion likely to remain flattish. While the outlook on retail sales is recovering, rental reversions for malls in prime locations are expected to remain flattish in the near term in our view as more new malls are completed, coupled with the proposed higher taxes on luxury goods expected in 2024. That said, we believe those established malls with good tenant mix are expected to stay resilient, with occupancy rates likely to remain steady. The latest mall that entered the market is the retail space of The Exchange TRX, which was unveiled in November 2023. We understand that the mall will house more than 400 stores with net lettable area (NLA) of 1.3msf, which is as big as Pavilion Kuala Lumpur.

Yield spreads still averaging about 200 basis points (bps). We note that current yield spread between the KL REIT Index (KLREI) and the 10-year Malaysia Government Securities (MGS) still hovering at about ~200bps, which is higher than historical average of 150bps. That said, we believe the widened yield spread is justifiable given the higher risk free rates globally. With BNM pausing interest rate hikes so far this year and the likelihood of the US Fed contemplating cuts later this year, we reckon the M-REITs are fairly-valued and expect yield spreads to hover around current levels. Our house view is that we anticipate OPR will remain unchanged at 3.00% for 2024. BNM has underscored that the existing OPR level aligns with a supportive monetary policy stance for the economy, in line with the current evaluation of inflation and growth prospects

Source: PublicInvest Research - 26 Jun 2024