KUALA LUMPUR (June 16): Kenanga Research favours real estate investment trusts (REITs) with niche exposure or own property assets in prime locations, which it believes will continue to provide resilient rental income streams.

Kenanga Research analyst Goh Yin Foo reaffirmed a “neutral” call on Malaysian REITs, saying they are still facing challenging times ahead under the broadly subdued economic climate, and with the prevalence of supply-demand gaps, particularly in the office and retail sub-sectors. 

In a note released on Friday (June 16), Goh said occupancy rates of both the purpose-built office space and retail segments will remain under pressure, with incremental supply amid lower demand.

“Even as economic activities are already back to usual post pandemic, the incremental take-up rate of office and retail spaces will likely be soft, in view of the slowing global economic outlook, the rising trend of flexible working arrangements, and weakened consumer spending power amid the elevated inflationary pressure,” he said.

Goh cited the 2022 Property Market Report by the National Property Information Centre (Napic), which revealed data on reduced occupancy rates of purpose-built office space and retail space in shopping complexes.

He said the Napic report also forecast increasing supply of purpose-built office space and retail space in shopping complexes through construction in progress and planned supply. 

With that, Goh's top picks are Pavilion REIT with a target price (TP) of RM1.47, and Sunway REIT with a TP of RM1.93. The firm has “outperform” calls for both stocks, with Pavilion offering potential total returns of 22.2%, and Sunway offering 27.7%. 

He remained cautious about Sentral REIT, given the latter’s high exposure to the office segment. For Sentral, he has a “market perform” call and a TP of 79 sen.