KUALA LUMPUR (April 7): Despite the outlook on retail sales improving, AmInvestment Bank expects rental reversions for malls in prime locations to remain muted in the near term as tenants will still require some time to recover to their pre-pandemic sales level.

The research house said in a note on Thursday that although retail sales and footfall have recovered since the relaxation of movement restrictions, it does not expect the recovery in retail sales and footfall to translate into a significant improvement in rental reversion rates for malls in the near term.

Citing the National Property Information Centre, it said the performance of shopping complexes continued to moderate in 2021, adding that the occupancy rate of malls in Kuala Lumpur remained in a downtrend on the back of rising total retail spaces.

"While we foresee more stable rental renewal rates for popular malls located in key areas, rental reversions for less established malls are likely to turn negative. For these smaller malls, increasing occupancy rates through attractive rents will be imperative," it said.

Meanwhile, it believed that the pressure on rental reversions for old office buildings in Kuala Lumpur city centre will persist given the growing oversupply of office space on the back of office decentralisation and flexible working arrangement trends.

According to the research house, the performance of offices in Kuala Lumpur continued to soften as overall occupancy rate fell further to 73.3% in 2021.

In 2021, total office space in Kuala Lumpur rose 5.8% year-on-year to 9,817.7 million square metres.

"Hence, we believe that management will either need to offer more competitive rental rates or embark on asset enhancement initiatives to retain existing and attract new tenants to improve occupancy rates in ageing offices buildings," it said.

However, it foresees gradual recovery in the hospitality segment from the reopening of international borders on April 1, 2022.

"We foresee the removal of quarantine measures for arrivals from Singapore and Thailand to be positive for hotels' occupancy rate and revenue per available room," it said.

According to the research house, Singapore and Thailand were the top five contributors to Malaysia's tourism and hospitality industries before the pandemic, accounting for 46% of Malaysia's total international tourist arrivals in 2019.

"We do not anticipate a significant recovery for the hospitality segment in the distant future. Tourists may remain sceptical about entering Malaysia on the back of daily infection rate of above 10,000 and the emergence of a more contagious Omicron sub-variant, the BA.2," it said.

Overall, it reiterated its neutral stance on the real estate investment trust (REIT) sector due to rising oversupply in office and retail spaces coupled with a narrowing yield spread between REITs and the 10-year Malaysian Government Securities with interest rates on the uptrend that could more than offset the positive prospects of Malaysia's reopening of international borders.

"We believe market sentiment will remain lacklustre on REITs in the near term as it is not appealing to yield-seeking investors. The average distribution per unit yield for stocks under our coverage is 4.1%," it said.

Its top buy is Sunway Real Estate Investment Trust (fair value: RM1.66), underpinned by its diversified investment portfolio which encompasses retail malls, hotels, offices, a university, and hospitals that spread across Malaysia; and strong occupancy rates which have exceeded 90% in retail assets.

Edited by Surin Murugiah

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