• Maintain OVERWEIGHT; Top Picks: Axis REIT (AXRB) and Sunway REIT (SREIT). We think M-REITs will continue to do well in 2025 on the back of strong fundamentals and a stable macroeconomic outlook. The occupancy rates for REITs under our coverage have improved to high levels, and managements are largely guiding healthy rental reversions ahead. While market sentiment has shifted to slower interest rate cuts in 2025, we think the downward trajectory would still be supportive of REITs' valuations over the medium term.
• The current dividend yield spread between the Bursa Malaysia REIT Index (KLREI) and Malaysia Government Securities (MGS10) is at +160bps - in line with the historical mean. Although the US 10-year bond yield has been more volatile, ranging between a low of 3.6% to a high of 4.7% in 2024, the MGS10 yield has remained broadly stable around 3.8%. While we do not expect any cuts to the overnight policy rate (OPR) in 2025, interest rate cuts globally should place downward pressure on the MGS10 yield, supporting REITs' valuations.
• Catalysts for retail assets. The growth rate of new supply of retail space in Kuala Lumpur is expected to ease over the next two years which should lead to better occupancy rates. Retail spending should also remain strong, boosted by a higher minimum wage, broad civil servants pay hike, and improving tourism industry. As such, we generally expect mid-single digit rental reversions for the retail REITs under our coverage, with more upside to rental rates for SREIT and IGB REIT following their major refurbishments.
• Opportunities for inorganic growth. We think the current improved sentiment on REITs (including sizeable listing of new REITs which could garner more interest) is favourable for asset acquisitions, to be funded via a combination of debt and equity with less dilutive effects. After AXRB's largest private placement yet in Oct 2024, 2025 will see a sizeable placement for Pavilion REIT (PREIT) acquisitions of Banyan Tree, Pavilion Hotel, and potentially for the balance payment of Pavilion Bukit Jalil. SREIT could also potentially enter the capital market as it targets to grow its portfolio to MYR14bn by end-2027 (from MYR10bn currently).
• Top Picks: AXRB and SREIT. We like AXRB as a proxy to the resilient industrial property segment. The REIT announced MYR684m in new acquisitions in 2024, which should result in a 10% DPU growth in FY25 despite its higher share base. We also like SREIT for its robust earnings outlook, underpinned by its diversified portfolio and active acquisition strategy.

Source: RHB Research - 7 Jan 2025