REITs shine as defensive assets in uncertain times
Naming Sunway-REIT and Axis-REIT as its top picks with target prices of RM2.31 and RM2.18, respectively, the research house reported that in the first half of this financial year (1H25), REITs outpaced the broader market, with the KL-REIT Index rising 3.7%, while the FBM KLCI fell 6.6%, reflecting investor preference for defensive assets.
In a note to clients yesterday, HLIB Research said: 'REITs notably outperformed, owing to their defensive appeal amid persistent external uncertainty, including US political risk and Middle East tensions.'
It said one of the biggest tailwinds for REITs is the easing of the 10-year Malaysian Government Securities (MGS) yield, which dipped below 3.5% from 3.8% in January, following strong foreign inflows and a 25 basis point cut to the overnight policy rate on July 9.
'This further widens yield spreads and enhances the risk-reward profile for REITs,' HLIB Research said.
As a result, the research house adjusted its 10-year MGS assumption from 4% to 3.7%, acknowledging a 'prudent buffer' to account for global rate differentials.
Looking at specific segments, it said retail REITs continue to show resilience despite new supply pressure, with retail space in the Klang Valley rising to 70.9 million square feet in the second half of financial year 2024 (2H24) and an additional 3.6% increase expected this year.
While this increase could strain tenant performance, the research house remained confident about malls with strong fundamentals, citing Pavilion Kuala Lumpur, Sunway Pyramid and Suria KLCC as malls that have maintained above 90% occupancy over the past five years.
'Malls with strong catchment areas and premium positioning will remain resilient,' it added.
The research house said retail trade grew 6.8% year-on-year from January to April this year, lifted by the minimum-wage hike in February, although it added it was expecting some moderation in 2H25 due to inflationary pressures.
HLIB Research said the the hospitality segment experienced a soft 1Q25 – with Sunway-REIT and KLCC's Mandarin Oriental seeing occupancy drops to 55% and 54%, respectively. However, the research house said it was nonetheless anticipating a strong rebound.
'We expect the hospitality segment to recover in 2H25, driven by the year-end holiday season and rising international tourist arrivals,' the research house said, adding that this would be supported by the Visit Malaysia 2026 campaign and a mutual visa exemption arrangement with China.
The research house said that Chinese tourists have become a key growth segment, accounting for 13% of arrivals and 20% of tourist receipts last year, surpassing pre-lockdown levels, adding that their spending is also rising.
HLIB Research said Chinese tourists tend to have longer vacations and are bigger spenders as well at an average of RM953 per day, compared with the average of RM770 per day for a non-Chinese tourist.
Meanwhile, it reported that Klang Valley's office space expanded to 118.3 million square feet in 2H24, but growth moderated to 0.7% last year, down from a 2.1% four-year average, which suggests a stabilising trend.
HLIB Research said it sees opportunities in Malaysia's push into 'high-tech and high-value sectors', which could boost demand for space to conduct research and development and house regional operations.
Among office-focused REITs, the research house favours IGB Commercial-REIT, citing its strategically located assets – particularly in Mid Valley City, supported by strong transport links and adjacent retail offerings.
HLIB Research also pointed to a rising trend in REIT diversification, noting that Pavilion-REIT is exploring hotel acquisitions; Sentral-REIT is adding retail assets; and Hektar-REIT is investing in industrial and solar assets.
'We favour this diversification strategy,' the research house said, highlighting Sunway-REIT's 35% exposure to non-retail and Axis-REIT's 20% in non-industrial assets.
It said the expanded Sales and Service Tax, which includes a rate of 8% on leasing and rental income above RM1mil, is expected to have minimal immediate impact on the sector.
'The additional costs are expected to be passed through to tenants,' HLIB Research said, though it cautioned this could pressure future rental revisions.
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