UOB Kay Hian
Date of Report: 26 June 2025

Malaysia REITs Poised for Outperformance in 2H25: Top Picks, Sector Outlook, and Key Strategies for Investors

Overview: Defensive Yield Plays Lead the Pack Amid Macro Uncertainties

Malaysia’s Real Estate Investment Trusts (REITs) sector has emerged as a top performer year-to-date, outshining the broader FBMKLCI despite challenging macro conditions. Driven by investor rotation into defensive yield assets, the sector has not only weathered a 7.4% decline in the FBMKLCI but posted an impressive 10.5% gain so far in 2025. This strong showing is underpinned by declining 10-year Malaysian Government Securities (MGS) yields, robust foreign inflows, and a flight to safety amid global uncertainties.

Sector Outlook: Selectivity Remains Key as Yield Opportunities Persist

• Yield Advantage: The sector boasts a compelling 12-month forward dividend yield of 5.7%, which is 0.5 standard deviations above the 10-year mean. Laggards like CapitaLand Malaysia Trust (CLMT) and Pavilion REIT (PREIT) are particularly attractive, offering forward yields of 7.7% and 6.4% respectively, providing strong buffers against downside risk.
• Strategic Acquisitions: REITs have accelerated yield-accretive acquisitions since 2024, capitalizing on falling financing costs and rising replacement costs. Funding through private placements has become more prevalent, especially for PREIT, CLMT, KIP REIT, and IGB REIT—supported by improved equity valuations. The focus is on inorganic growth at attractive cap rates, with minimal dilution or leveraging existing gearing headroom.
• Interest Rate Tailwinds: With two overnight policy rate (OPR) cuts anticipated in 3Q and 4Q 2025, REITs with high floating-rate debt exposure—such as PREIT (87.5%) and Sunway REIT (SREIT, 52.0%)—stand to benefit the most. For every 25 basis point rate cut, PREIT and SREIT are projected to save RM8.3 million and RM6.0 million in interest, respectively, translating to 2% and 1% of their 2026 earnings forecasts.

Top Picks and Peer Comparison: PREIT and CLMT Lead the Way

The sector is rated as MARKET WEIGHT, with a preference for REITs that offer:

• High-quality retail and hospitality assets in prime locations with high occupancy rates
• Industrial assets benefitting from sustained e-commerce and logistics growth
• Strong sponsor backing and visible inorganic growth pipelines

Peer Comparison Table

Macroeconomic and Regulatory Factors Impacting Malaysian REITs

• SST Expansion: The government’s expanded sales and service tax (SST) framework, effective July 1, 2025, is expected to have a modest impact on REITs. While the 8% service tax on rental services could raise consumer prices by about 2%, overall tenant sales may see only a temporary 2-5% dip post-implementation. REITs with lower exposure to gross turnover (GTO) rent, like CLMT (8-10%) and KLCCSS (1-2%), should be relatively sheltered, while those with higher GTO rent could see a marginal earnings impact of around 1%.
• Electricity Cost Hike: A potential 15% rise in electricity costs could reduce sector earnings by 2%. Retail-focused REITs face higher exposure, while industrial REITs like Axis REIT are less affected, as tenants bear utilities costs. CLMT and PREIT could see a 7% and 4% impact on earnings, respectively, though the effect should be mitigated by ongoing acquisitions in industrial and hospitality assets.

In-Depth Company Analysis

Pavilion REIT (PREIT MK) – BUY | Target Price: RM1.69

• PREIT is positioned to benefit the most from falling interest rates, given its extremely low fixed-rate borrowing mix (only 13%).
• Pavilion KL Mall continues to enjoy rising footfall and robust tenant sales, supported by an influx of inbound tourists.
• Recent acquisitions of Banyan Tree KL and Pavilion Hotel KL are set to further capitalize on increased demand from the upcoming Visit Malaysia 2026 campaign.
• The target price is based on a discounted dividend model (required rate of return: 7.8%, terminal growth: 2%), implying a 2025 dividend yield of 5.5%.

CapitaLand Malaysia Trust (CLMT MK) – BUY | Target Price: RM0.78

• CLMT’s strength lies in its resilient neighbourhood malls and its expanding footprint in industrial assets, with RM400 million in acquisitions providing a stable, recurring income stream.
• A private placement targeted to complete in 3Q25, alongside three new industrial acquisitions, is expected to be DPU-accretive for 2026/27.
• The company offers an attractive 8% dividend yield, with the target price implying a 6.2% 2025 yield (discounted dividend model: required rate of return 8.2%, terminal growth: 1.5%).

Sunway REIT (SREIT MK) – HOLD | Target Price: RM2.05

• Downgraded to HOLD following recent share price outperformance.
• The retail segment remains resilient, benefiting from essential-driven hypermarkets and the full reopening of Sunway Carnival Phase 2.
• Near-term headwinds are expected in the hotel and office segments, with increased competition for Sunway Putra Hotel and subdued office rents due to new supply.
• The target price is DDM-based (required return: 7.5%), with an implied 2025 dividend yield of 5.2%.

Axis REIT (AXRB MK) – HOLD

• With an 11.6% YTD price increase, Axis REIT remains a steady performer.
• It is least impacted by potential utility cost hikes, as 75% of its portfolio consists of single-tenanted properties where tenants bear utilities costs.
• Dividend yields hover around 4.7%-5.0% for 2024-2026.

IGB REIT (IGBREIT MK) – BUY

• IGB REIT has delivered a robust 16.8% YTD share price increase.
• With high-quality retail exposure, the REIT offers stable returns, with dividend yields rising from 4.3% in 2024 to 5.3% in 2026.
• ROE stands at a strong 8.7% with a market cap of RM9,018 million.

KLCC Stapled Group (KLCCSS MK) – HOLD

• KLCCSS recorded an 8.8% YTD share price increase.
• It enjoys a low GTO rent exposure (1-2%) and offers dividend yields of 5.0%-5.5% for 2024-2026.
• Boasts the highest market cap among peers at RM15,977 million.

KIP REIT (KIPREIT MK) – NR

• KIP REIT has participated in the acquisition-driven growth trend with private placements to fund new assets.
• Its yields are comparable to Axis REIT, at 4.7%-5.0% for 2024-2026, and it is less affected by utilities cost pressures.

Sector Risks and Ongoing Developments

• Ongoing Regulatory Uncertainty: REITs are closely monitoring final details on the expanded SST, especially on business-to-business exemptions and possible further extensions. Rental renewal negotiations may pause until clearer guidance emerges, though prime assets have largely completed 2025 renewals.
• Utility Tariff Adjustments: The new monthly automatic fuel adjustment (AFA) is yet to be announced. Any significant hike is likely to have a more pronounced effect on retail-focused REITs.

Conclusion: Malaysia REITs Offer Attractive Yield and Growth, But Selectivity is Key

Malaysia’s REIT sector presents a compelling mix of defensive yield, strategic acquisition-driven growth, and resilience amid regulatory headwinds. Investors should focus on REITs with strong retail and industrial assets, proven sponsor support, and clear inorganic growth pipelines. PREIT and CLMT stand out for their dividend yields and visibility into future growth. With potential interest rate cuts on the horizon and a supportive macro backdrop, the sector remains attractive for yield-oriented investors, though careful selection is essential as valuations have rerated after strong gains this year.