Kenanga Research downgrades sector call on REITs to ‘neutral’

• In a separate note, Hong Leong Investment Bank (HLIB) also maintained a “neutral” outlook on the REIT sector. 

KUALA LUMPUR (Jan 9): Kenanga Research has downgraded its sector call on real estate investment trusts (REITs) to “neutral” from “overweight”.

In a note on Thursday, the research house said while there have been share price movements on previous "buy" calls, including big-cap stocks like KLCC REIT (KL:KLCCP), it believes that the potential value within the REIT sector has already been moderately priced in by the market.

The downgrade comes amidst a shift in the market dynamics, with industrial players like Axis REIT (KL:AXREIT) actively pursuing acquisitions. However, Kenanga anticipates that Axis REIT’s acquisition pipeline is likely to slow down in the near term, especially given rising prices in the industrial real estate space.

Kenanga’s report also highlighted that office occupancy and rental rates have largely remained stable. 

In the third quarter of 2024 (3QCY24), office occupancy rates were reported at 71.6% for a total private office space of 18.8 million square metres.

The research house noted that demand for office spaces remains robust in high-growth sectors such as technology and finance. 

Nevertheless, Kenanga pointed out that offices located on the fringes of Kuala Lumpur and Selangor — especially those with high connectivity — are in a better position than those within the city centre. This is attributed to affordability concerns among Malaysian corporations.

In a separate note, Hong Leong Investment Bank (HLIB) also maintained a “neutral” outlook on the REIT sector. 

The research house noted the compressed spread between 10-year Malaysian Government Securities (MGS) and local REITs could prevent stronger buying interest in the sector.

HLIB remained selective in favouring companies with strong fundamentals that are expected to continue outperforming in 2025.

The research house highlighted stable growth in the industrial segment, noting a significant increase in transaction volume for industrial properties in greater Kuala Lumpur. 

During the first nine months of 2024 (9M2024), 29 industrial property deals worth RM1.4 billion were recorded, driven by robust economic growth.

HLIB remained positive on Axis REIT, with a target price of RM2.16, citing its solid track record, strong tenant base, diversified portfolio and strong acquisition pipeline.

For the retail sector, HLIB warned that the addition of 4.2 million square feet of new retail space in greater Kuala Lumpur in 2025 could potentially strain occupancy and rental rates for shopping malls in the region.

HLIB was similarly positive on Sunway REIT (KL:SUNREIT), assigning it a target price of RM1.96, due to its prime malls, consistent footfall, diversified assets and positive rental reversion prospects.

Conversely, HLIB expressed caution on office REITs due to persistent oversupply and flat rental reversion expectations.

Office vacancy rates in the Klang Valley remained elevated at around 33% as of 3Q2024, with sluggish demand unable to absorb new supply. This trend is expected to limit rental growth and pose negative rental reversion risks in 2025, according to HLIB.

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