The recent engagement with Sunway REIT’s management revealed a pivotal shift in the REIT’s strategic direction. In a thoughtful recalibration of its Transcend 2027 strategy, Sunway REIT is intensifying its focus on retail—the sector where it has historically excelled—while scaling back its earlier ambitions to significantly diversify into services, industrial, and international properties. We are positive on this refined approach as it underscores a strategic decision to capitalise intensively on Sunway REIT’s most robust asset class, ensuring focused growth and enhanced shareholder value. Maintain Buy on Sunway REIT with an unchanged TP of RM1.98, based on target yield of 5.5% and a 3% ESG premium.

Refining Transcend 2027

Sunway REIT’s Transcend 2027 roadmap sets an ambitious target to grow its assets to RM14-15bn by 2027. The strategy centres on optimising its portfolio, driving asset enhancement initiatives (AEIs), and selectively expanding into new asset classes, particularly in the services and industrial sectors. In a recent discussion with Sunway REIT’s management, it was revealed that the REIT is making a pivotal shift in this roadmap. Initially, they aimed to allocate 20-30% of the portfolio to services and industrial assets, and 10-20% to foreign properties. However, due to evolving market conditions—particularly the compressed yields in the industrial sector—the REIT is adopting a more flexible approach.

This adjustment enables Sunway REIT to focus on yield-accretive retail opportunities while staying open to acquisitions in other sectors without rigid targets. We believe this more adaptable strategy strengthens the REIT’s agility, empowering it to leverage its core competencies for sustained long-term growth. By focusing on high-performing retail assets, Sunway REIT is better positioned to compete and build a resilient portfolio in the challenging market landscape.

Building a Diversified Retail Portfolio

As part of this strategic recalibration, Sunway REIT is concentrating on developing a diversified retail portfolio that will bolster income resilience by FY27. The portfolio is segmented into four categories: Super-Regional Malls, Regional Malls, Neighbourhood Malls, and Big-Box Retail (refer to Appendix 1). Super-regional malls, such as Sunway Pyramid, attract a mix of local and international visitors, while regional malls like Sunway Carnival serve growing

areas like Penang. Neighbourhood malls and big-box retail cater to the daily

Needs of Nearby Residential Communities.

This approach allows Sunway REIT to tap into a broader consumer base, ensuring a more balanced and resilient income stream. By targeting underserved markets and expanding geographically across Malaysia, the REIT reduces regional risks while reinforcing its competitive edge through expert management and curated experiences.

Recent acquisitions, including six Giant hypermarkets for the big-box retail segment and 163 Mall in Mont Kiara and Kluang Mall for neighbourhood malls — underline Sunway REIT’s focus on retail diversification. The acquisition of Kluang Mall also marks the REIT’s first foray into central Johor, a region poised to benefit from upcoming infrastructure projects.

By FY27, the retail portfolio is expected to consist of 40% super-regional malls, 30% regional malls, 20% neighbourhood malls, and 10% big-box retail, compared to the current makeup of 63% super-regional malls, 15% regional malls, 12% neighbourhood malls, and 10% big-box retail. We anticipate that this diversification will support sustained growth, enhance portfolio resilience, and reduce reliance on a single segment, while tapping into high-growth, underserved markets. It also positions Sunway REIT to more effectively adapt to changing consumer trends and market conditions.

High-Performing Retail Assets Reinforce the Transcend 2027 Strategy

Sunway REIT’s track record in the retail sector is impressive, with an average occupancy rate above 95% over the past five years — significantly outperforming the national average of 77%. This exceptional performance underpins the refined Transcend 2027 strategy, which focusses on maximising retail strength. Moreover, Sunway REIT has maintained high occupancy rates without sacrificing rental growth. In 1H24, the retail segment saw rental

reversions in the teens, supported by a positive market outlook and strong

Demand.

AEIs have been critical in driving this growth, complementing the benefits of new acquisitions. While acquisitions offer immediate portfolio expansion and yield potential, AEIs, such as the Oasis Precinct transformation at Sunway Pyramid Mall, optimise existing assets to maximise returns. Set for completion in November 2024, the project is converting a low-yield area into a highperforming retail zone, with rental rates expected to more than double. This balance between AEIs and acquisitions supports a well-rounded growth trajectory under the Transcend 2027 strategy.

The RM440mn expansion of Sunway Carnival Mall’s new wing, completed in 2022, expanded its net lettable area from 455,000 sq ft to 770,000 sq ft. This expansion has delivered impressive results, with sales per square foot up by 50% and average rental rates rising 30% over five years. For the first time, tenant sales per square foot during the recent Raya festive season matched those of the flagship Sunway Pyramid, showcasing the positive effects of these refurbishments. With the refurbishment of the existing wing on track to be completed by June 2025 and over 90% of tenants already secured, further growth is expected. These achievements highlight Sunway REIT’s strategic emphasis on regional malls and underscore the potential for continued expansion in this segment.

Positive on the Shift

Overall, we are positive on Sunway REIT's recalibrated Transcend 2027 strategy as it enhances flexibility, allowing the REIT to focus on yield-accretive retail opportunities while staying open to acquisitions across various sectors. This adaptive approach strengthens its ability to leverage core retail strengths, navigate changing market conditions, and drive long-term growth, all while targeting a balanced and diversified portfolio for greater resilience. Meanwhile, management expects to finalise the acquisitions of an industrial property in Prai, 163 Retail Park in Mont Kiara, and Kluang Mall in Johor by the second half of the year. These three assets are projected to raise Sunway REIT’s total property value to RM10bn upon completion. Looking ahead, Sunway REIT will continue actively seeking properties that align with its investment criteria and deliver strong yields. Management remains confident in achieving the Transcend 2027 target of growing the portfolio to RM14-15bn by FY27.

Impact

We have made no changes to our FY24-26 earnings forecasts

Recommendation and Valuation

We maintain Buy recommendation on Sunway REIT with an unchanged TP of RM1.98/unit, based on a CY25 target yield of 5.5% and a 3% ESG premium.

Source: TA Research - 18 Sept 2024