2022 a turnaround year for retail and hotel REITs
KUCHING,. The real estate investment trust (REIT) industry is expected to see a turnaround in the financial year 2022 (FY22) and FY23, supported by the recovery in both the retail and hotel segments, analysts observed.
“We believe FY22 and FY23 will mark the turnaround year for REITs counter after two years of hardship, supported by the recovery in both retail and hotel segment.
“With the gradual recovery of retail footfalls and hotel occupancy, coupled with potential easing of aggressive rate hikes by Federal Reserve, we are seeing a widening yield spread for REITs against the 10-year MGS yield and expect REITs sector to be appealing to yield-seeking investors with its high distribution yield of six to 11 per cent,” said the research team at AmInvestment Bank Bhd (AmInvestment).
It pointed out that there has been a significant uptick in tenants’ sales in the first nine months of 2022 (9M22).
“We gather that the tenants’ sales of majority of the malls that fall under our coverage have rebounded to 90 to 110 per cent of the pre-covid level in 9M22 with the improvement in footfall traffic.
“As such, we anticipate the rental reversion in FY22F to be mildly positive especially for the malls situated in prime locations (such as Mid Valley Megamall, Pavilion Kuala Lumpur, Sunway Pyramid),” it opined.
However, it also pointed out that the rental reversions for less established malls are likely to remain flattish or slightly negative.
“For these smaller malls, increasing occupancy rates through attractive rents will be imperative. Nevertheless, we expect the footfall and tenant sales will continue to be strong in 4Q22 on the
back of the holidays and festive seasons,” it said.
As for the office segment, AmInvestment expected occupancy and rental reversion rates would likely stabilise.
“However, we expect a flattish rental reversion in FY22F/FY23F, particularly for older office buildings in Kuala Lumpur city centre, given the growing oversupply of office spaces on the back of office decentralisation and flexible working arrangement trends,” it said.
As for the hospitality segment, AmInvestment expected gradual recovery from the resumption of leisure activities and the reopening of international borders.
“We observed a reversal in the downtrend of the hotel occupancy rate since 2Q22 along with a recovery in average daily rate (ADR) brought on by the arrival of domestic and foreign tourists as
well as the return of MICE (Meetings, Incentives, Conferences, Exhibitions) and business events.
“Given that we are approaching the year-end holiday season, we believe that the hotel segment will continue to have encouraging growth in 4Q22. Another positive catalyst will be the potential return of China tourists, which made up 12 per cent of Malaysia’s foreign tourist arrivals in 2019,” it said.
As for the impact of US Fed’s monetary policy, AmInvestment pointed out that it might ease off on its recent aggressive rate policy rate hikes which has affected Malaysia’s 10-year MGS yiield.
All in, AmInvestment upgraded its rating on the sector to ‘overweight’ based on its improving performance.