HLIB less bullish on Malaysia’s REIT sector as tax removal squeezes yields, investors shift to alternatives

KUALA LUMPUR (April 22): Hong Leong Investment Bank (HLIB) has decided to downgrade Malaysia’s real estate investment trust (REIT) sector from “overweight” to “neutral”, citing narrow yield spreads against other asset classes and rising competition from high-dividend alternatives.

HLIB said while underlying earnings remain resilient, the removal of the 10% withholding tax concession has compressed post-tax yields and necessitates a derating to restore return thresholds for impacted investors.

For instance, banking stocks are delivering post-tax yields between about 5% to 5.5% in 2026 and 2027, outpacing the REIT sector after the recent tax policy changes.

“This relative yield disadvantage is further accentuated by more favourable tax treatment in regional peers such as Singapore, where REIT distributions are exempt for individuals (subject to 10% withholding tax for certain non-resident investors) and taxed at a 17% corporate rate for resident companies (with key concessions extended to Dec 31, 2030)”, it added in a note on Wednesday.

At the same time, HLIB also highlighted that an upward bias in interest rate expectations is weighing on sentiment as the country’s 10-year government bond yield has edged up to 3.6%, reflecting concerns over inflationary pressure from the Middle East conflict. This causes yield spreads to be compressed and the sector’s appeal to be weakened.

Despite the headwinds, REIT earnings continue to be supported by rental reversions, acquisitions and asset recycling. However, the research house cautioned that rising operating costs could cap reversion upside, particularly for tenants nearing lease expiry.

The top picks of HLIB are Pavilion Real Estate Investment Trust (KL:PAVREIT) and Axis REIT (KL:AXREIT).

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