KUALA LUMPUR: Malaysia's real estate investment trust (REIT) sector remains well-positioned to deliver resilient earnings and attractive distributions, with rental growth, asset enhancement initiatives and acquisitions expected to drive its next phase of expansion, according to RHB Research.
The research house maintained its "Overweight" call on the sector, citing resilient earnings, stable occupancy rates and attractive dividend yields despite rising bond yields and economic headwinds.
It said the recent decline in REIT valuations was largely driven by market conditions rather than a deterioration in underlying business performance.
The research firm named Axis REIT and Pavilion REIT as its top picks, citing their growth prospects and potential to deliver stronger distributions to unitholders.
RHB Research said the sector's earnings remained healthy, with companies under its coverage recording revenue growth of about 15 per cent and earnings growth of around 17 per cent in the first half of 2026 compared with the same period last year.
However, part of the growth came from IGB REIT's acquisition of Mid Valley Southkey, which boosted its earnings.
Looking ahead, RHB Research expects earnings growth to moderate in 2027 as the benefits from recent acquisitions become part of the previous year's earnings base.
Future growth will increasingly depend on rental increases, improvements to existing properties, higher occupancy and new acquisitions, it said.
Axis REIT stands out for its potential to expand through acquisitions and property development, with at least RM250 million in additional opportunities under consideration, according to the research house.
RHB Research also expects government measures to support the sector's outlook.
The 2027 Budget initiatives involving household assistance, tourism and investment incentives could support consumer spending and business activity, while enhanced incentives for global services hubs from January 2027 could boost demand for higher-quality office space.
The extension of the Visit Malaysia campaign into 2027, backed by RM935 million for tourism and culture, could also benefit retail properties and shopping centres.
For industrial REITs, the proposed Johor-Singapore Special Economic Zone blueprint could create further demand for industrial space in Johor.
However, a potential increase in interest rates remains a risk. RHB Research expects Bank Negara Malaysia to raise the overnight policy rate by 25 basis points in the first half of 2027.
"Assuming a full-year 25 basis point increase in borrowing costs, our sensitivity analysis indicates that sector forecast earnings for the financial year 2027 would decline by up to two per cent, which we believe should be manageable," the research firm said.
Other risks include narrowing dividend yield spreads, higher-than-expected inflation and prolonged increases in energy prices.
Among its preferred stocks, RHB Research has a target price of RM2.44 for Axis REIT, implying potential upside of 29.8 per cent, while Pavilion REIT has a target price of RM2.18, representing potential upside of 39.7 per cent.
© New Straits Times Press (M) Bhd