REITS: Widening yield spread against 10-year MGS in 2H24 (OVERWEIGHT Maintained)

We maintain our overweight stance on REIT sector. We anticipate retail REITs to continue experiencing healthy growth in 2024F, driven by stable occupancy rates and positive rental reversions. This is underpinned by a stable labour market, modestly higher inflation rate of 2.5%-3.5% accounting for the impact of subsidy rationalisation and service tax increase, coupled with a continued gradual recovery in tourist arrivals. Meanwhile, the hospitality segment of REITs is poised to benefit from government policies aimed at boosting tourism. The gradual influx of international tourists back to pre-pandemic levels is expected to contribute to retail sales improvement.

We see buying opportunities in Malaysian REIT stocks given widening yield spread against 10-year MGS yield amidst the tail end of monetary policy tightening and potential 2H24 interest rate cuts in developed economies. Our in-house economist anticipates the Fed funds rate to peak at current levels of 5.25%-5.5%. We expect the uptrend in 10-year US Treasury yield to taper off after a pause in the Federal Reserve’s rate hikes in 4Q2023.

We are positive on the prospect of prime malls as rental reversions and occupancy rates edge closer to pre-pandemic levels. Considering the strategic locations and strong market positioning of renowned shopping destinations such as Mid Valley Megamall, Pavilion Kuala Lumpur and Sunway Pyramid, we anticipate a positive mid-single-digit rental reversion of 5%-6% in 1HFY24F vs 3%-6% in FY23F, aligning with pre-pandemic levels.

We believe that the implementation of various governmental initiatives to boost the tourism sector are expected to result in a higher YoY influx of foreign tourist to Malaysia in 2024F. These initiatives are expected to support Tourism Malaysia’s projection of international tourist arrivals in Malaysia for 2024F, targeting a 24% YoY growth to 20mil, reaching 76% of the level observed in 2019. Furthermore, these measures are expected to further enhance footfalls in tourist-centric shopping malls such as Pavilion Kuala Lumpur, Sunway Pyramid and Suria KLCC.

Our top BUYs are Pavilion REIT (FV: RM1.62/unit), IGB REIT (FV: RM1.92/unit) and YTL REIT (FV: RM1.11/unit).

Source: AmInvest Research - 5 Jan 2024