M-REITs growth dimmed by bearish fundamentals


RHB Investment Bank Bhd’s research unit believes further supply of new retail space will weigh on the performance of retail-based local Real Estate Investment Trusts (M-REITS) and has thus put a ‘Neutral’ call on the sector.

The bank added given the more muted recovery pace as rental reversions for both retail and office segments will likely be subdued in view of the looming supply of commercial space in the market.

However, the robust demand from the technology sector and e-commerce will benefit industrial REITS, a RHB report yesterday noted.

The bank is however more positive on Singapore based REITS (S-REITS) due to stronger growth prospect expected topped with improved supply and demand dynamic which underpin healthy rental reversion prospects.

The average yield for S-REIT now stands at 5.8% compared to 4.1% for M-REITS.

RHB has thus maintained an ‘Overweight’ recommendation on S-REITS.

“Although interest rate hikes are generally unfavourable to REITs, we think the impact is lesser for S-REITs given the expectation of a stronger economic rebound, as well as earnings growth for the sector,” it added.

“Singapore’s Grade-A office segment continues to see positive rental reversions, while the anchor retail malls in Malaysia are experiencing a healthy recovery in footfalls.”

While the report expects a gradual recovery on 2022 outlook, the bank remains cognisant of the underlying oversupply situation as medium-term overhang factor may lead to soft reversion rates ahead.

As such, it remains ‘Neutral’ on the sector, due to the expectation of an interest rate hike in the second half of the year (2H22), leading to sentiment on M-REITs as a yield play should be lacklustre.

“With the impending interest rate hike, we believe M-REITs may underperform this year, added with the looming supply of large format retail malls within the Klang Valley which may deter rental reversion,” the RHB report stated.

The report added that the timing of the general election in Malaysia may somewhat affect consumer sentiment in 2H22.

“We are cautiously optimistic on the prospects of a recovery in the retail sub-sector, in view of the pick-up in foot traffic and tenant sales, post relaxation of movement restrictions,” the report added.