Growing Competition Among REITs for Mall Traffic

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Discover the latest insights on Malaysian real estate investment trusts (REITs) and their competitive landscape in attracting mall visitors. Stay informed about the projected trends and potential impacts on the retail sector.

KUALA LUMPUR, 22th Apr 2024 – The anticipated target yields for Malaysian real estate investment trusts (REITs) are projected to stay consistent throughout the year, assuming that the overnight policy rate (OPR) set by Bank Negara remains at 3%.

Kenanga Research expressed a preference for a rate reduction rather than an increase from Bank Negara, believing it would benefit REIT valuations. They noted that the 10-year Malaysian Government Securities yield, a key benchmark for valuation, has remained below 4% since dropping from its peak of 4.75% in October 2022. Consequently, Kenanga assumed a 4% risk-free REIT valuation.

The research firm expressed a preference for retail REITs situated in strategic locations, particularly with the impending launches of the 118 Mall and Pavilion Damansara Heights in the Klang Valley. However, Kenanga Research cautioned about potential competition for foot traffic, anticipating that The Exchange TRX could be affected by the proximity of these new malls, in addition to established ones like Pavilion Bukit Bintang and Suria KLCC.

“The saturated market may find some relief with eased visa requirements for neighboring countries, alongside a depreciated ringgit. Furthermore, we anticipate a surge in tourism in the upcoming quarters, which should boost the retail sector,” stated the research firm.

The research firm noted a rise in mall occupancy rates in the latter part of the previous year, contributing to increased rental earnings driven by enhanced tenant sales, boosted foot traffic, and consistent occupancy levels, particularly in premier shopping destinations across the Klang Valley.

Regarding office REITs, Kenanga Research anticipates a surge in office space availability with five new office complexes scheduled for completion in the first half of the current year.

Some of these additions comprise Felcra Tower and the upcoming space at The Exchange TRX developed by Lendlease, which will add 1.4 million square feet to the Klang Valley’s current office inventory.

“This follows the recent completion of four new office projects – Merdeka 118 tower, the PNB 1194 office building, Aspire Tower, and Pavilion Damansara Heights Corporate Tower – which led to a decline in the overall occupancy rate of purpose-built offices to 78.6% from 79% in June 2023,” the report stated.

The research firm observed that Grade A buildings situated in decentralized areas with robust connectivity and green certifications are expected to remain resilient due to sustained demand.

Kenanga Research’s preferred choices include KLCC-REIT, valued for its appeal to international shoppers and its customer base comprising higher-income individuals likely unaffected by proposed tax increases.

Sunway-REIT is also favored by the research firm due to its expected minimal impact from The Exchange TRX’s entry, given the distance of its landmark assets from the mall and its ownership of several Grade A office buildings in prime locations.

Taking all these factors into account, Kenanga Research has maintained a “neutral” stance on the sector.

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