We downgrade our sector call on REITs to NEUTRAL from OVERWEIGHT after some of our conviction OUTPERFORM calls gained 3%−12% in their share prices over the past three months such as the big-cap KLCC (MP; TP: RM8.33) and SUNREIT (OP; TP: RM2.01). While we believe the potential value to be extracted on a sector-wide basis has been fairly priced in by the market, we continue to see opportunities in certain REITs. Our top pick is SUNREIT (OP; TP: RM2.01), driven by two earnings catalysts: (i) Sunway Pyramid's new wing (OASIS), which opened recently with 110 new tenants paying significantly higher rates than the previous anchor tenant, and (ii) 200K sq ft of new space at Sunway Carnival Mall, currently under renovation, targeted for completion by 1HCY25. We remain positive on PAVREIT (OP; TP: RM1.63), as its crown jewel Pavilion KL has demonstrated resilience in sustaining strong footfalls despite the debut of rival TRX Mall. Meanwhile, the recent share price weakness in CLMT (OP; TP: RM0.70) appears unwarranted, presenting an opportunity for accumulation.

1. Retail Mall occupancy rates dipped marginally. 3QCY24 retail occupancy rates in shopping complexes came in at 77.6% (1HCY24: 78.1%) from a total retail space of 18m sq m. Policies' influences. The implementation of the diesel subsidy rationalisation has caused minimal impact on consumer behaviour as most logistic vehicles are still eligible for diesel subsidies. Post-announcement of Budget 2025, we are keeping an eye on further subsidy rationalization in mid-2025. However, we believe this will be partially supported by the return of tourists and the up to 13% pay hike for most civil servants in Dec 2024.
2. Office Office occupancy & rental rates fairly maintained. 3QCY24 occupancy rates stayed at 71.6% of 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 at the fringe of KL and Selangor that are highly integrated are in a better position as compared with the KL city as affordability remains a key concern for Malaysian corporations. Positive net absorption rates. Commendably, net absorption rates have been positive for newer office buildings in CY24 in Klang Valley as tenants are on a "flight to quality" mode. On that note, older buildings are still expected to face pressures fighting for tenants moving forward. On the ESG front, more than one-third of the current office space is green-certified, underscoring the importance of sustainable office spaces in the market.
3. Hospitality Strong recovery ahead. Hotels in Klang Valley have seen notable recovery in the last few quarters. Given the increased allocation on tourism in the national budget and our in-house projection of 27.7m tourist arrivals in Malaysia (+15% increase from 2024), we anticipate stronger growth from the hoteling business, especially in names like SUNREIT and KLCC.

Our Sector Call We tone down our call to NEUTRAL from OVERWEIGHT on REITs. Following the share price action on some of our previous buy calls such as the big-cap KLCC, we believe the potential value to be extracted on a sector-wide basis has been moderately priced in by the market. In addition, industrial player like AXREIT have been on a buying spree this year, and we believe that its acquisition pipeline should likely slow down in the near term, especially given rising prices in the industrial space. Notwithstanding that, we continue to see opportunities in certain REITs.

Our top pick of the sector is SUNREIT given the following two earnings catalysts: (i) Sunway Pyramid's new wing (OASIS) has opened in November CY24 with 110 new tenants who are paying significantly higher rates than the previous anchor tenant; and (ii) an additional 200K sq ft of new space in Sunway Carnival Mall currently under renovation scheduled to be added into the NLA by 1HCY25. With good progress in securing tenants, we anticipate a further increase in occupancy and rental growth in FY25. We are also positive on PAVREIT as its crown jewel, Pavilion KL, continues to demonstrate resilience in sustaining strong footfalls even after the debut of rival TRX mall. Meanwhile, we believe the recent share price weakness in CLMT is unwarranted, presenting an opportunity for investors to accumulate.

Source: Kenanga Research - 9 Jan 2025