• Maintain NEUTRAL with Top Picks: Axis REIT and IGB REIT; Axis REIT for its position in the industrial segment and IGB REIT as a recovery play. We expect to see a gradual recovery for MREITs this year, in line with the broader economic recovery. The reopening of international borders on 1 April 2022 was especially welcomed for the struggling hotel segment and tourist-reliant malls. However, we maintain a NEUTRAL call as the combination of flat rental reversions and expected rate hikes will probably keep yields at unappealing levels.

• Recovery underway for the retail segment. Despite COVID-19 cases reaching c.30k per day at end-February due to the Omicron variant, management revealed that footfalls remained stable, only displaying an expected post-Lunar New Year dip. While we cannot rule out new COVID- 19 variants that may prove more disruptive in the future, we think that this is encouraging for this sub-sector that is just beginning to recover. This is reflected in the Department of Statistics Malaysia’s (DOSM) recent Wholesale & Retail Trade report which showed a 10.2% YoY growth for February, with a slight decrease of 0.4% MoM.

• However, rental reversions will likely remain flat this year. The priority for REITs will be on improving their occupancy rates. The recovery for retailers is uneven as some smaller malls are still trying to recover from the pandemic. We believe that rental assistance will remain in 1H22, albeit at a much smaller quantum. The influx of new retail space also adds pressure to REITs to maintain occupancy rates. The focus for investors should be on REITs with prime retail assets that can withstand these pressures.

• Opportunities abound in the industrial segment. This segment has been the bright spot for the sector as the fast expansion of e-commerce industries due to pandemic resulted in a strong demand for warehousing and logistical assets. After our recent discussion with Knight Frank (please refer to our report dated 15 April 2022) we believe there is still plenty of room to grow for the segment. We also note that Sunway REIT and CLMT expressed their desire to expand into this segment in the near future to also capture its growth.

• Unappealing yield play. The yield spread between REITs and Malaysian bonds is currently c.56bps (below -2SD from the historical mean) after the Malaysian bond yield rose by 64bps YTD (155 bps since Jan 2021). With our RHB economics team forecasting a 25bps rate hike in 2H22, followed by a 50bps rate hike in 2023, the bond yield curve should steepen further, keeping the yield spread at relatively unattractive levels. At the time of writing, yields for REITs under our coverage averaged c.4%.

• Top Picks: Axis REIT and IGB REIT. We like Axis REIT as it is a key player in the booming industrial segment, benefitting from the rise in e-commerce. We also like IGB REIT for its prime assets, domestic shopper profile, and a relatively high turnover rent portion which will benefit from an increase in sales.

Source: RHB Research - 22 Apr 2022