Top 3 REITs to Buy as Malaysians Go Shopping

Billy Toh

March 28, 2022

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Shopping is a national pastime in Malaysia. Aside from the pleasure from shopping, Malaysians usually take refuge from the tropical heat in air-conditioned shopping malls. That creates opportunities for investors.

While the COVID-19 pandemic and lockdown measures imposed to contain the spread of virus have affected the shopping malls over the last two years, confidence of a recovery is gaining momentum amid the milder Omicron variant.

Further relaxations of the Standard Operating Procedures (SOPs) and the return to shopping malls will boost the recovery of the retail industry and, likewise, real estate investment trusts (REITs).

In fact, both the Malaysia Retail Association (MRA) and Malaysia Retail Chain Association (MRCA) expect the Malaysia retail industry to grow by 16.5% in the 1Q 2022.

Given the potential recovery of the retail industry and the reopening of international borders by April, I believe it provides a good opportunity to buy into some of the top Malaysia REITs that are involved in the retail space.

Here are three top REITs investors can buy as Malaysians return to shopping malls.

1. IGB REIT

IGB REIT (KLSE: 5227) is one of the most popular REITs around. It only has two shopping malls in its portfolio – Mid Valley Megamall and The Gardens Mall. However, these two malls are the most renowned shopping centres in Malaysia.

Both Mid Valley Megamall and The Gardens Mall closed its fiscal year 2021 (FY2021) with high occupancy rates of 99.8% and 99.5%, as compared to the retail sector’s end-2021 average occupancy rate of around 72%.

There is also an indication that rental assistance and rebates have eased – based on its net profit margin of 78% in the 4Q FY2021, the highest since the pandemic began in the first quarter of FY2020.

In terms of its dividend, IGB REIT has distributed 6.03 sen per share to unitholders, which represents around a 3.7% yield (see below).

With the recovery of the retail industry and the return to normalcy, I expect to see both Mid Valley Megamall and The Gardens Mall be key beneficiaries.

Source: IGB REIT, ProsperUs

2. Pavilion REIT

Pavilion REIT (KLSE: 5212) is one of the largest retail-focused REITs in Malaysia.

Its assets are strategically located at the golden triangle of Kuala Lumpur and will benefit from the reopening of international borders.

Currently, it has five properties in its portfolio, which include the Pavilion Mall, Pavilion Tower, Intermark Mall, Da Men Mall and Elite Pavilion Mall.

The management has highlighted that footfall and tenant sales recovery momentum will continue into the first half of this year, driven by the festive season, such as the Chinese New Year and Hari Raya celebrations.

Tenancy negotiations and renewals in the 4Q FY2021 were encouraging with potential rental reversion growth of around 3% to 5% in FY2022 as compared to a -3% rental reversion in FY2021.

There is also a clearer path to recovery, with Da Men mall expected to breakeven in FY2023. Currently, the group is evaluating a potential acquisition of Pavilion Bukit Jalil, which was opened in December 2021.

While there are challenges over some of its recovery, especially with new mall openings such as the Mitsui Shopping Park Lalaport KL, the company’s growth path and strong portfolio put it in a good position to tap on the recovery of the retail sector and the reopening of international borders.

In 4Q FY2021, Pavilion REIT declared a final dividend of 1.9 sen per unit, bringing the full-year dividend per unit (DPU) to 4.4 sen.

This translates to a dividend yield of 3.5%. With the recovery ahead, I expect to see its dividend to increase in tandem.

3. Sunway REIT

Another REIT involved in the retail space is Sunway REIT (KLSE: 5176). Unlike both IGB REIT and Pavilion REIT – which specialise in the retail segment – Sunway REIT is more diversified with retail, hospitality, corporate offices and even education-focused properties.

According to management, all retail operating indicators (including footfall and tenant sales) have improved close to pre-pandemic levels.

Notable properties under its portfolio are the Sunway Pyramid Mall, Sunway Medical Centre, Sunway Putra Mall, and Sunway University.

Among the laggards in its portfolio is the hotel segment, which was severely affected by the Movement Control Order (MCO) and closure of international borders.

With the reopening of borders in April, I expect this to benefit Sunway REIT.

In terms of the REIT’s dividend, the DPU for FY2021 is at 6.1 sen, which translates to about a 4.4% dividend yield.

Challenges remain for retail segment but recovery within reach

The COVID-19 pandemic has affected the retail segment severely but as the world moves beyond the pandemic phase, I expect to see a recovery in the retail segment.

The Omicron wave is a risk to take note of but, as seen in most countries, there is a shift towards normalcy.

And with Malaysians returning to their favourite shopping malls, I expect to see these three REITs benefit.

On top of that, the reopening of international borders will see the return of foreign tourists.

While it is too early to call it a win for these REITs, I think it is the right time for long-term investors to gradually add some of these dividend plays into their portfolio to withstand the volatility in the stock market.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

About the Author: Billy Toh

Billy is passionate about the capital market and believes in investing for the long haul. Prior to this, he was an economist at RHB Investment Bank, covering Thailand and Philippines market. He also worked as a financial journalist at The Edge Malaysia and has experience working with an asset management firm. Aside from the capital market, Billy loves a good conversation over a cup of coffee, is a fitness enthusiast and a tech geek.