• Maintain NEUTRAL on MREITs. The strong recovery pace in the retail segment seen in 1Q22 will likely continue, boosted by the maximum MYR10k EPF savings withdrawal and reopening of international borders. We are more cautious on the downward pressure for offices coming from a change in working arrangements and supply glut. With the current global inflationary environment, we turn more positive on REITs as a defensive play due to their “guaranteed” rental income. However, we encourage investors to pick those with quality assets as it remains a tenant’s market.

• Retail recovery is promising despite headwinds. Retail sales in 1Q22 grew 18.3% YoY as shopper traffic returned to major shopping malls, which we attribute to strong pent-up demand, relaxing restrictions, and the successful vaccination programme. We think inflationary pressures will be the key risk moving forward as customers’ purchasing power will be affected, but the MYR10k EPF withdrawal should help to boost spending up until 3Q22. In light of the encouraging retail recovery, the Retail Group Malaysia has revised upwards its retail sales growth assumption for 2022 from 6% to 6.3%.

• Focus still on occupancy levels. Due to the supply glut, compounded by an expected new total net floor area of >4.5m sqf from new malls opening this year, reversions are likely to be in the flattish to low single-digit range. Managements guided that rental assistance should be minimal in 2H22, and some MREITs have already ceased providing rental assistance in 1Q22. While the office segment has remained stable throughout the pandemic, we are cautious on the downward pressure from tenants downsizing their presence in offices to adopt a hybrid work model. In this segment, we recommend KLCCP Stapled for its Grade A office buildings that can withstand these risks, in our view.

• More players coming in the industrial segment. In the past month, both CLMT and Sunway REIT have announced acquisitions of industrial properties as part of their plans to have a higher of proportion of industrial assets in their portfolio. We think opportunities in the segment remain strong, as reflected by Axis REIT’s growing acquisition target this year.

• Yield spread at an all-time low. The US and Malaysian 10-year bond yields rose by c.165bps and 72bps YTD, resulting in a spread between MREITs and Malaysian bonds of just 12bps. With the expectation of further rate hikes until 2023, the yield spread will likely remain at unattractive levels. Currently, yields for MREITs under our coverage average at c.4.4%

• Top Picks: Axis REIT and IGB REIT. We like AXRB as it is a key player in the booming industrial segment, benefitting from the rise in e-commerce. We also like IGBREIT for its prime assets, domestic shopper profile, and a relatively high turnover rent portion, which will benefit from an increase in retail sales.

Source: RHB Research - 28 Jun 2022