Kenanga Research & Investment

REIT - FDs, Bonds, or REITs

kiasutrader
Publish date: Wed, 02 Oct 2024, 10:13 AM

We reiterate our OVERWEIGHT sector call on REIT. We anticipate the declining MGS yield to further decline by year-end which will make REITs more attractive. Retail segment is set to see healthy growth going forward while the hospitality segment will see stronger recovery ahead. We prefer REITs with malls and hotels in hot spots while keeping an eye on potential further subsidy rationalisation in the upcoming 2025 national budget. Post model updates following a site visit, we have fine-tuned our TP for SUNREIT from RM1.77 to RM1.81 driven by higher conviction for its NPI growth after it refurbished Sunway Carnival, Seberang Perai. Our top sector picks are SUNREIT (OP; TP: RM1.81) and PAVREIT (OP; TP: RM1.66) given the recovery in hotel business and further anticipated growth from Pavilion Bukit Jalil and Sunway Carnival Mall.

1. Retail

Mall occupancy rates & rental rates improved modestly. 1HCY24 retail occupancy rates in shopping complexes came in at 78.1% (2HCY23: 77.4%) from a total retail space of 17.8m sq m, albeit still below pre-Covid norms.

Policies’ influences. With the implementation of diesel subsidy rationalisation, impact on consumer behaviour has been minimal at the current juncture as most logistic vehicles are still eligible for diesel subsidies. The recent appreciation in MYR may alleviate the country’s persistent inflation (i.e. from import costs) which has hurt consumer spending. We are mindful of the possibility of further subsidy rationalization in the upcoming 2025 budget; however, we believe this will be partially supported by the return of tourists and the up to 13% pay rise for most civil servants in Dec 2024.

Upcoming retail spaces. Two new retail spaces within Kuala Lumpur will be Sunway Pyramid’s 300k sq ft additional net lettable area which is scheduled for opening end of this year while Pavilion Damansara Heights (Phase 2) may only open after its Phase 1 has gained good traction. We are confident that space in matured malls such as Sunway Pyramid will be easily filled up given its consistent close-to-full occupancy underpinned by robust demand for retail space.

2. Office

Office occupancy & rental rates fairly maintained. 1HCY24 occupancy rates stood at 71.6% (previously 71.9% in 2HCY24) from a total private office space of 18.8m sq m. Besides seeing growing demand for office spaces from high-growth sectors such as technology and finance, we believe offices in KL fringe and Selangor area that are highly integrated will still be in demand relative to KL city as affordability remains a key concern for Malaysian corporations.

More supply to come. In 2HCY24, the market is projected to add another million sq ft to existing supply of 18.8m sqft. Despite improving economic environment, we foresee the office market in Klang Valley to see pressure going forward given a higher supply as compared to previous years - likely to weigh down on rental rates growth. Notably on the ESG front, more than onethird of the current office spaceis green-certified, underscoring the importance of sustainable office spaces in the market.

3. Hospitality

Strong recovery ahead. Hotels in the Klang Valley have seen notable recovery in the last quarter, we have also gathered that hotel room bookings for coming months have been encouraging. Given our in-house projections of 27.7m tourist arrivals in Malaysia (+15% increase from 2024), we anticipate to see stronger growth from the hoteling business especially names like SUNREIT and KLCC.

Our Sector Call

We reiterate our OVERWEIGHT call on REITs. Following net foreign investment inflows to Malaysian bond market, we expect to see MGS yield to further weaken to 3.6% by year-end, after having recently eased from 4.0% to 3.7%. The widening gap between REIT yields (c.6% average within our sector) will be even more pronounced and could call for yield-seeking investors to further accumulate.

Our TP upgrade on SUNREIT was prompted after we met with management during a site visit to Sunway Carnival in Seberang Perai. The mall has been transformed into a large vibrant space with a refreshed tenant mix, featuring mid-to-slightly higher-end brands after the launching of a new wing and refurbishment of the old one, which makes them the highest percentage growth mall under SUNREIT portfolio. Another 200k sq ft of spaces currently under renovation is targeted to be added into the NLA by 1HCY25. With the progressive incoming tenants, we anticipate further increase in occupancy and rental growth in FY25 prompting an upgrade to our FY25F earnings by 2.5%.

Our top sector picks are: (i) SUNREIT for the recovery in its hospitality arm and growth catalyst from Sunway Carnival Mall, and (ii) PAVREIT mainly underpinned by further occupancy growth in Pavilion Bukit Jalil.

Source: Kenanga Research - 2 Oct 2024

Related Stocks
Market Buzz
Discussions
Be the first to like this. Showing 0 of 0 comments

Post a Comment