Local REITs face market headwinds despite resilient fundamentals; weakness may offer buying opportunities

THE local Real Estate Investment Trusts (M-REITs) are generally regarded as defensive investments because they generate stable rental income, maintain relatively resilient earnings and provide consistent distributions to investors.

However, their share prices can be volatile and sensitive to external factors, including interest rates, investor fund flows and tax policies.

Consequently, despite their defensive fundamentals, REITs have demonstrated cyclical market performance.

Interest rates are a key driver of REIT valuations. Rising government bond yields reduce the attractiveness of REIT distribution yields relative to fixed-income investments while increasing borrowing costs.

This puts pressure on REIT valuations and share prices. Historically, the KL REIT Index underperformed the FBM KLCI in 2018, 2020, 2021 and 2026 year-to-date.

The COVID-19 pandemic further affected performance in 2020 and 2021, as lockdowns reduced shopping mall traffic and hotel occupancy, weakening rental income and operating performance.

Fund flows also influence the sector. REIT performance has generally correlated with foreign investor movements, although domestic retail buying supported the market in 2023 and 2024.

In 2026, local retail investors became net sellers following the expiry of the 10% withholding tax on REIT distributions, which are now taxed according to individual tax brackets.

This change reduced the after-tax returns for some investors and contributed to the sector’s share price weakness.

MBSB Research maintains a Positive outlook on Malaysian REITs, viewing recent share price weakness as a potential buying opportunity.

The research house’s preferred REITs are Sunway REIT, Pavilion REIT and IGB REIT, all rated BUY.

Sunway REIT has a target price of RM2.39, supported by solid retail performance and positive rental reversion prospects.

Pavilion REIT has a target price of RM2.00, underpinned by expected rental growth at Pavilion Kuala Lumpur and Pavilion Bukit Jalil.

IGB REIT has a target price of RM2.90, supported by quality assets, including Mid Valley Megamall, The Gardens Mall and Mid Valley Southkey.

Overall, investors should consider both distribution yields and long-term DPU growth, while remaining mindful of interest-rate movements, fund flows and taxation when evaluating Malaysian REITs. —Oct 19, 2026

Main image: moneycontrol.com

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