KUALA LUMPUR (Oct 3): Maybank Investment Bank Bhd (Maybank IB) has upgraded its rating for the domestic real estate investment trust (REIT) sector to “positive”, as it is expected to see better earnings growth on the back of sustained occupancy and rental rates, coupled with new asset injections.

The REIT sector is expected to deliver core earnings growth of 8.3% in 2024 and 9.8% in 2025 as compared to 4.9% in 2023, the research house said in note on Thursday.

“We continue to like M-REITs (Malaysian) that are invested in the industrial segment for their resilient earnings due to longterm tenancies, with rental reversion outlook remaining strong,” Maybank IB said.

REITs with matured retail assets located in prime locations could sustain their high occupancy rates and allow for positive rental reversions, Maybank IB said. It has a top “buy” pick on Axis REIT (KL:AXREIT).

Moreover, the spread between the REIT sector’s forward dividend yield and the 10-year Malaysian Government Securities (MGS) yield has been on an upward trend due to better earnings prospects and moderately lower MGS yield.

“The higher yield spread offers a better risk-reward prospect for M-REITs with the sector now trading at 6.0%-12 months forward average net yield and 233 bps (basis points) above the 10-year MGS yield,” it said.

Meanwhile, it noted that most REITs under its coverage still comprise mainly floating rate loans, ranging at 54% on average, which amounted to RM11.5 billion out of a total debt of RM21.2 billion for the sector as at the end of the second quarter of 2024 (2Q2024).

However, the unchanged overnight policy rate (OPR) has provided a temporary respite to the sector after higher financing costs in 2023, said Maybank IB.

Bursa Malaysia’s REIT Index has risen 9.6% as at end-September 2024, driven by the easing of US Federal funds rate and optimism surrounding improved corporate earnings.

Shopping complexes in Kuala Lumpur, Selangor, Penang and Johor recorded higher occupancy rates in 2Q2024 compared to a year ago, Maybank IB said, citing the National Property Information Centre (Napic).

“However, the national average occupancy rate of 78.1% was still below pre-pandemic level of 79.2% in 2019. Moving forward, the retail segment continues to face challenges from new supply especially in the Klang Valley,” it said.

Nonetheless, Maybank IB is positive on prime malls such as Suria KLCC, owned by KLCCP Stapled Group (KL:KLCC); Pavilion KL, by Pavilion REIT (KL:PAVREIT); Mid Valley Megamall and The Gardens Mall, under IGB REIT (KL:IGBREIT); Sunway Pyramid Mall Sunway REIT (KL:SUNREIT) as well as Gurney Plaza and Queensbay Mall, under the CapitaLand Malaysia Trust (KL:CLMT).

Meanwhile, shopping malls like 3 Damansara and Sungei Wang Plaza (both owned by CapitaLand) and PavREIT’s DA MEN may face increased competition and potential earnings risks, it added.