M-REITs positioned to sustain defensive appeal

PETALING JAYA: Malaysian real estate investment trusts (M-REITs) continue to be weighed down by the expiry of the longstanding withholding tax concession and elevated bond yields, says RHB Research.

The withholding tax refers to a final flat 10% withholding tax deducted at source for individual investors, where these holdings were also not required to file on their tax forms.

From the beginning of 2026, this tax concession has been discontinued, with resident individuals required to file and progressive rates up to 30% while foreign individual investors would be taxed at a flat 30% rate.

RHB Research noted that while the Bursa Malaysia REIT Index has underperformed the broader market year-to-date, it continues to like domestic REITs for their defensive profile and stable distributions amid uncertain macroeconomic conditions.

The recent second quarter of financial year 2026 (2Q26) results broadly reaffirmed the research house’s positive stance on M-REITs as fundamentals have improved, while their de-rating has also improved the risk-reward at current valuations.

It has maintained an “overweight” rating on REITs.

Among the house’s REIT coverage, it has maintained “buy” calls for Pavilion-REIT and Axis-REIT, with target prices of RM2.18 and RM2.44, respectively.

It said all eight REITs under coverage met expectations in 2Q26, and on a market-capitalisation-weighted basis, revenue and earnings grew 14.5% and 15.6% year-on-year but moderated 3.2% and 6.5% quarter-on-quarter mainly on seasonally softer retail performance.

“We like Axis-REIT for its industrial scale and visible inorganic pipeline, which should support stronger financial year ending Dec 31, 2027 (FY27) earnings.

“We also like Pavilion-REIT supported by the sustained demand for prime retail assets and further rental productivity upside from Pavilion KL’s ongoing reconfiguration,” it said.

It explained that despite the 10-year Malaysian Government Securities yield spread standing at 220 basis points (bps) due to rising bond yields, the correction in M-REITs’ share prices has also lifted yields, keeping the spread at an attractive level.

It expects net property income for retail REITs to normalise from the strong first half of financial year 2026 (1H26) levels, as the shift in automatic fuel adjustment from a rebate to a surcharge since May partly offsets the electricity cost savings from the July 2025 tariff revision.

Industrial REITs should remain relatively insulated given their lower utilities exposure.

It expects the benchmark overnight policy rate to remain at 2.75% into 1H27, with a 25-bps hike to lower 1H27 earnings by 2%.

“Taken together, we expect these headwinds to remain manageable, while healthy leasing fundamentals should preserve earnings and distribution visibility.”