• After a strong recovery in rental rates for retail REITs in FY23 coming off a lower base post-pandemic, we expect M-REITs’ growth to normalise in FY24F as the sector lacks any fresh catalysts to uplift earnings. As such, we prefer industrial REITs for better growth prospects – underpinned by an improving manufacturing sector. That said, we are keeping an eye out on any potential interest rate cuts that could boost sentiment for M-REITs. Maintain NEUTRAL; Top Picks: Axis REIT and IGB REIT.

• Stability for retail. Occupancy rates for retail M-REITs have mostly improved across the board, although KLCCP Stapled’s (KLCCSS) and PREIT’s rates are still below 2019 levels. This should help offset the downside risk to retail spending from the subsidy rationalisation measures and High Value Goods Tax (HVGT). The improving tourism industry should help offset any slowdown in spending from domestic consumers. However, we think rental reversions should normalise to mid-single digit following the strong recovery in FY23.

• More pressure on rental rates. 4Q23 saw the opening of The Exchange TRX bringing in a NLA of 1.3m sqf which is comparable to Suria KLCC (1.1m sqf) and Pavilion KL (1.3m sqf). 2024 should also see the opening of Warisan Merdeka Mall @ 118 with a reported NLA of 900k sqf and Pavilion Damansara Phase 2 (529k sqf). While the supply of new retail space is expected to lead to more pressure on rental rates over the near term, in the long term, the competition would also mean that major retail players will likely be more aggressive and active in their marketing activities and tenant remixing/refreshing exercise for long-term sustainability.

• Flight to quality offices. According to Knight Frank, the more active transactions involved new office buildings with comprehensive green features – indicative of the continued flight-to-quality trend. As such, we remain cautious on REITs with older office assets such as Sentral REIT which may need to lower rental rates to maintain occupancy rates – especially for buildings with single tenants as they typically have higher bargaining power.

• Positive on industrial REITs. We maintain our BUY calls on AME REIT and Axis REIT. Although the pace of acquisition slowed in FY23 following the sharp rise in valuations as asset owners placed a premium on their properties, industrial REITs should continue to record healthy rental reversions each year with minimal risk of non-renewals.

• Top Picks: Axis REIT and IGB REIT. We like Axis REIT for its earnings recovery prospects driven by higher occupancy levels and the completion of major asset redevelopments. IGB REIT is our pick for the retail segment, as we think its fully occupied buildings and 6% dividend yield provide a strong defensive play.

Source: RHB Research - 10 Jan 2024