MREITs’ fundamental outlook still sluggish

KUALA LUMPUR: Malaysia’s real estate investment trust (MREIT) sector’s fundamental outlook is expected to remain sluggish as the oversupply of retail and office spaces bite into rental prices, analysts observed.

“MREITs’ reversions outlook remains sluggish with most MREITs expecting single-digit reversions at best as the oversupply of retail, office and even hotels favour tenants instead of asset owners.

“As such, strong reversions will remain challenging as tenants will prefer to prioritise occupancy over reversions but the saving grace for these segments are quality landmark assets and/or locations, which can weather oversupply conditions better by being able to attract higher footfall traffic,” the research team at Kenanga Investment Bank Bhd (Kenanga Research) said in an update report on the sector.

It highlighted that the industrial assets segment has a better footing as its single-digit reversions are on par with other asset classes (retail and office), but lease terms are longer at circa six to 10 years (compared with two to three years for retail and office) providing earnings stability over the longer term.

“FY19 will see circa 21 to 53 per cent leases up for expiry for MREITs under our coverage, with the largest being PAVREIT at 53 per cent of net lending asset (NLA).

“However, we are not overly concerned for Pavilion REIT (PAVREIT) as the bulk of its lease expiries is from Pavilion Shopping Mall (65 per cent of its NLA up for expiry) which we believe would have no issues of securing/maintaining tenants as occupancy is consistently strong at more than 95 per cent due to strong shopper traffic.