Sunway REIT’s capital recycling exercise strategically sound

SUNWAY Real Estate Investment Trust’s (Sunway-REIT) decision to dispose of the 27-year-old Sunway Hotel Seberang Jaya (SHSJ) for RM60mil has raised investor anxieties over near-term yield dilution and an apparent tilt towards development-heavy investments.

As one of Malaysia’s most established retail-focused REITs, Sunway-REIT has long been anchored by its portfolio of stabilised, income-generating assets.

But the trustee’s latest move, which is a related-party sale followed by the construction of a new hotel above Sunway Carnival Mall, is testing investor comfort levels, especially as dividends remain the primary reason many choose REITs over traditional equities.

But management is adamant that this shift is strategic, deliberate and financially justified.

The sale, which represents a 9.1% premium to SHSJ’s market valuation and generates a RM4mil disposal gain, is, as Sunway-REIT states, “part of its ongoing capital recycling strategy”.

The REIT argues that SHSJ has reached its economic plateau.

Refurbishing the decades-old structure would have required costly structural works, would have been constrained by outdated room sizes, and would still fail to offer amenities expected of modern hotels, such as additional parking and a swimming pool.

In short, the asset had limited long-term potential.

The proceeds will be redeployed into the construction of a RM140mil hotel directly atop Sunway Carnival Mall.

This integrated development is described by the REIT as a strategic investment to strengthen Sunway-REIT’s hospitality segment and enhance long-term portfolio value.

“The new hotel, positioned within the vibrant Sunway Carnival Mall integrated development, is expected to capture synergies from retail, leisure and business activities, enabling higher returns compared to a refurbishment of the existing asset,” Sunway-REIT Management Sdn Bhd acting chief executive officer/chief financial officer Ng Bee Lien tells StarBiz 7.

With a ballroom, upgraded facilities and seamless mall connectivity, the new hotel is also poised to compete as a meetings, incentives, conventions and exhibitions venue in mainland Penang, a rapidly expanding market.

The core concern among investors, however, is whether this forward-looking strategy compromises the REIT’s yield stability.

Sunway-REIT insists it does not.

“There will be no impact on income distributions to unitholders, as the lease agreement with the lessee will remain in effect throughout the construction period of the new hotel. The disposal is scheduled to be completed in approximately two years.

“The new hotel is expected to deliver stronger income potential and improved yield relative to the divested property, contributing positively to unitholder returns and portfolio resilience,” she explains.

Analysts broadly agree with this assessment.

CGS International Research, which reiterates its “hold” call and target price of RM2.16, is “neutral” on the asset disposal move as earnings impact should be minimal

Meanwhile, MBSB Research stresses that the contribution from the new hotel, once operational, will more than compensate for the eventual loss of income from SHSJ.

Even with the transition, analysts have maintained their earnings forecasts.

Howver, another layer of concern has emerged: is Sunway-REIT gradually behaving more like a developer than a yield-focused investor?

The REIT counters this by highlighting that property development activities remain well within regulatory limits.

Ng points out that the Securities Commission allows REITs to undertake development projects up to 15% of total asset value.

Maybank Investment Bank Research (Maybank IB) notes that Sunway-REIT’s combined RM602mil in ongoing property developments, including the RM462mil Sunway Pier redevelopment in Port Klang, amounts to just 5.6% of total asset value.

The REIT underscores that these are not speculative endeavours but targeted enhancements of income-producing assets designed to unlock latent value.

Ng explains, “Selective development or redevelopment projects are undertaken to unlock value and enhance long-term earnings visibility.”

Analysts appear aligned with this reasoning.

Maybank IB views the disposal and reinvestment as “strategically sound,” even if near-term upside remains limited.

CGSI regards the initiatives as part of a disciplined asset enhancement strategy aimed at sustaining long-term distribution per unit (DPU) growth.

MBSB Research similarly takes a neutral stance, citing limited share price upside following recent market strength and compressed yields at 4.6%, but acknowledges the earnings stability underpinning Sunway- REIT’s core retail assets.

Governance concerns

Another issue bubbling beneath the surface is the governance dimension.

Because the sale involves related parties within the Sunway Group, investors have questioned whether the transaction sufficiently protects minority interests. Ng stresses that rigorous safeguards are in place.

She states that all related-party transactions are conducted with strict adherence to governance rules, reviewed by the board and audit committee, and supported by independent valuations.

It also emphasises that related parties “do not participate in any deliberation or decision-making process,” and that the transaction is done at a 9% premium over valuation.

These assurances aim to quell unease over potential conflicts of interest.

Investors have also questioned whether Sunway-REIT is becoming overly concentrated within the Sunway ecosystem, potentially limiting diversification.

Ng acknowledges the value of diversification but explains that reinvestment within the group is pursued only when assets meet the same investment criteria and yield thresholds applied to external acquisitions.

She argues that internally generated assets offer strong integration synergies, brand equity and operational efficiencies not easily replicated elsewhere.

Nonetheless, she affirms that it continues to evaluate external opportunities to retain a balanced portfolio.

For now, the REIT’s financial position remains solid.

Its third-quarter results underscore strong retail momentum, rising hotel occupancy, and continued improvement across its diversified portfolio.

The Sunway Carnival Mall expansion, completed in 2022, has become a showcase of successful asset rejuvenation, helping to elevate the mall’s retail performance to levels comparable with Sunway Pyramid, the REIT’s flagship asset.

That said, the future hinges on execution.

Ng says Sunway-REIT is targeting a 6% to 7% yield-on-cost for the new hotel over a 10-year period, a level that is competitive with stabilised hospitality returns.

The project is expected to complete around the same time the SHSJ disposal is finalised, minimising yield gaps and positioning the REIT to capture stronger long-term returns.

As Ng puts it, the investment aims to “future-proof the asset for long-term growth.”

Ultimately, the debate centres on whether Sunway-REIT can successfully balance near-term yield expectations with its ambitions for long-term asset value creation.

Investors who prioritise stability may see the move as a departure from the REIT’s traditional playbook, while others may view it as a calculated evolution consistent with modern REIT strategies globally, where selective development is increasingly used to enhance portfolio quality.

What is clear is that Sunway-REIT believes its long-term mandate remains unchanged.

The coming years, particularly the execution of the Sunway Carnival Mall hotel and the large-scale Sunway Pier redevelopment, will determine whether this confidence translates into tangible returns.

For now, the market remains watchful.

The REIT is staking its future on the belief that higher-quality assets, synergistic developments and integrated ecosystems will ultimately outweigh short-term yield worries.

If Sunway-REIT can maintain stable distributions while elevating the long-term potential of its hospitality and retail portfolio, the temporary unease among investors may give way to renewed confidence in its strategy.