Malaysian REITs may have more downside ahead, CGS International flags

KUALA LUMPUR (April 27): Despite recent corrections, Malaysian real estate investment trusts, or REITs, have yet to fully price-in the loss of withholding tax perk, CGS International flagged.

REITs with higher foreign ownership and domestic institutional investors are expected to face more pronounced share price corrections due to greater net yield compression and these investors are more likely to rebalance their holdings, the research firm said.

“We believe investors likely still underestimate the impact of the valuation distortion,” CGS International said, downgrading the Malaysian REIT sector to “neutral” from “overweight”.

Malaysia decided in March to stop giving a preferential rate of 10% for withholding tax on dividends from REITs for most non-corporate investors beginning 2026.

Foreign individuals and institutional investors will be taxed at 30% of chargeable income. Non-resident corporations, meanwhile, will pay a final 24% withholding tax rate. Malaysians, meanwhile, will be taxed based on prevailing individual rates with no withholding tax deduction.

CGS International’s analysis found that the weighted average tax rate will increase “meaningfully” across the sector, ranging from 1.1% for KLCC Real Estate Investment Trust (KL:KLCC) to 7.4% for Axis Real Estate Investment Trust (KL:AXREIT).

However, REITs with higher ownership by government-linked investment companies, as well as sponsors and strategic investors, are expected to show “greater price resilience” as their effective tax rates remain broadly unchanged, resulting in minimal yield compression, CGS International said.

While profit distributions of Malaysian REITs remain intact, the higher effective tax burden raises required yields and compresses fair values, the research house said.

“Going forward, we expect investor focus to shift increasingly towards DPU growth visibility and asset quality, with REITs that demonstrate resilient income growth and active capital management better positioned to offset the structural de-rating pressure,” the research house added.

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