REITs see onslaught of supply, retail to hold up better

KUCHING: Kenanga Investment Bank Bhd (Kenanga Research) reiterates its neutral call on real estate investment trusts (REITs), preferring retail REITs with malls in strategic locations while being mindful of the excess supply in the office segment.

That said, it exercised caution on the medium-term prospects, considering potential drags on consumer spending due to elevated inflation, a higher sales and service tax (SST) and the impending fuel subsidiary rationalisation.

“Two more gigantic malls to open this year. While we are positive on REITs with malls in strategic locations, we are mindful of competition for footfall posed by new sizeable high-profile malls in an already highly saturated market,” Kenanga Research said.

“Two new malls within Kuala Lumpur with a collective retail space of circa 1.5 million square feet, are scheduled for openings this year, 118 Mall and Pavilion Damansara Heights (Phase 2).

“These will be on the heels of the onslaught of the Exchange TRX and Pavilion Damansara Heights (Phase 1) malls in 2H23.”

Situated in the heart of the city and home to over 500 experiential stores, Kenanga Research believes the potential impacts of The Exchange TRX to the retail market could not be avoided especially to malls in close proximity such as Pavilion KL and Suria KLCC.

“The crowded market could be partially cushioned by the relaxation on visas application for several neighbouring countries, coupled with a cheaper ringgit, we believe tourism will be on the rise in coming quarters, benefiting the retail segment.”

Meanwhile, mall occupancy rates improved slightly in 2H23. Based on National Property Information Centre’s (NAPIC) 2H23 Property Market Report, occupancy rates of retail space in shopping complexes came in at 77.4 per cent from an occupied space of 13.7 million square metres on a total retail space of 17.7 million square metres.

“This supported higher rental income from improved tenant sales amid rising footfall and sustained occupancy levels especially in prime shopping centres in Klang Valley.

“We are mindful that the performance of retail malls could be weighed down by weakened consumer spending on elevated inflation, the increase in the SST to eight per cent from six per cent, and the introduction of a luxury tax ranging from 5 per cent to 10 per cent and the impending fuel subsidy rationalisation.

“On the flip side, tourist arrivals and their spending may be boosted by a weak ringgit.”

Looking at office space, Kenanga Research expect to see more of this to hit the market.

Five new office buildings are pending completion in 1H24 which will contribute another circa 1.4 million square feet to Klang Valley’s existing cumulative office stock, two of which are located in KL City, namely Felcra Tower, and The Exchange TRX Office by Lendlease.

These will be on the heels of the recent completion of four new office developments, namely Merdeka 118 tower, PNB 1194 office building, Aspire Tower, and Pavilion Damansara Heights Corporate Tower, which contributed to a drop in overall purpose-built office occupancy rate to 78.6 per cent from an occupied space of 19.6 million sqm against a total office space of 24.9 million sqm.

“Despite increased supply, Grade A buildings in decentralised locations with strong connectivity and green certifications are expected to remain relatively resilient for its strong and growing demand.

“Also, there is demand for office spaces from high-growth sectors such as technology, finance, and professional services.”