REITs may see tougher second half as new tax pressures tenants, landlords—CIMB Securities

• There are already signs of softening consumer spending, as reflected in weaker tenancy sales among retail REITs under coverage. 

KUALA LUMPUR (June 17): Real estate investment trusts (REITs) in Malaysia could expect a tougher second half as new taxes pressure both tenants and landlords, said CIMB Securities.

The expanded sales and service tax (SST) may raise tenants’ operating costs and limit REITs' rental reversion, said CIMB Securities. Every one percentage-point fall in rental reversion could reduce core net profit for REITs under coverage by up to 2%, according to the research house’s estimates.

“Additionally, the broader SST coverage may weigh on consumer sentiment, resulting in lower sales volume, potentially affecting the variable rent component for retail REITs,” CIMB Securities said in a note.

The government plans to charge 8% tax from July 1 on leasing and rental services as part of the expansion of the SST. Exemptions, however, are provided for residential rentals, reading material, and small and medium businesses with annual rental revenue below RM500,000.

Retailers themselves have earlier complained that the SST further strain retail businesses and ultimately impact consumers through increased inflation. Rental is among the largest fixed costs for many businesses, according to the Malaysia Retailers Association.

There are already signs of softening consumer spending, as reflected in weaker tenancy sales among retail REITs under coverage, CIMB Securities said, noting decline in sales per square foot at Sunway REIT (KL:SUNREIT) and IGB REIT’s (KL:IGBREIT) Mid Valley Megamall.

Further, the looming increase in electricity tariffs could raise property operating costs and further pressure REITs’ earnings if they are not passed through to tenants, CIMB Securities flagged.

An increase of nearly 15% in the base tariff, if it translates into a similar increase in power tariffs, will reduce the earnings of Sentral REIT (KL:SENTRAL), IGB REIT, and Sunway REIT by about 2%, according to CIMB Securities’ estimates.

Only Axis REIT (KL:AXREIT) will face minimum impact from the potential revision of electricity tariffs as 74% of its properties are single-tenanted, cutting into its earnings by less than 1%, the house noted.

Overall, the house maintained its "neutral" call on the Malaysian REIT sector with all trusts under coverage on "hold" except Axis REIT, the house’s sole "buy" for its “upside potential, relatively stable cost structure, and resilient tenant base”.

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