• Top Picks: Axis REIT and IGB REIT. We maintain our NEUTRAL call on the sector as rerating catalysts remain limited amid the structural oversupply in the retail and office sectors, high interest rates globally, and gradual return of tourists to Malaysia. M-REITs offer a steady defensive play with minimal downside risks to earnings in the short term, and the sector’s dividend yield spread vs the 10-year Malaysia Government Securities (MGS10) yield is close to +1SD from the historical mean.

• Retail segment remains strong. Retail REITs continue to be stable, backed by a strong domestic economy. According to the Department of Statistics Malaysia, retail trade was up by 5.5% YoY in July (0.5% MoM). Occupancy rates for malls under our coverage have also remained robust, underpinning the various management teams’ guidance of mid-single digit rental reversions for FY23. As such, the retail REITs under our coverage are well positioned to capitalise on the seasonally stronger 4Q due to the year-end festivities.

• Headwinds for retail. We are cautious on the incoming supply of new malls, which could compress long-term rental reversions, especially as the new malls offer many of the same anchor tenants as existing malls. In this regard, we think that REITs’ track record in refreshing offerings from hosting events and updating tenant mix can keep their malls competitive. We also keep an eye out on policy risks that could impact consumer’s spending power such as the introduction of a luxury tax, subsidy rationalisation, and/or the reintroduction of the Goods and Services Tax (GST).

• Office occupancy stabilising. Office occupancy in Kuala Lumpur has increased slightly YoY to 73.5% in 1H23 (1H22: 71.6%), possibly due to more employees returning to office since the economic reopening. That said, the flight to quality trend remains, especially as the supply of green certified office buildings come into the market over the medium term.

• Industrial segment still attractive. The pace of industrial acquisitions has slowed down following the sharp rise in valuations during the pandemic as asset owners placed a premium on their properties, compressing the property yield. That said, because of the favourable supply-demand dynamics for landlords, we remain positive on industrial assets, which should record healthy rental reversions each year with minimal risk of nonrenewals.

• Top Picks: Axis REIT is our new Top Pick for the industrial segment. We expect its occupancy level to increase following the signing of new tenancies and the commencement of its lease with SPX Xpress at the newly redeveloped Bukit Raja Distribution Centre 2. We like IGB REIT in the retail segment because of its fully occupied properties and high proportion of turnover rent, which could benefit from a pick-up in retail sales

Source: RHB Securities Research - 4 Oct 2023