PETALING JAYA: The real estate investment trust (REIT) sector may continue to face headwinds on the back of muted consumer sentiment, said Kenanga Research.

In a note today, the research house said that the possible implementation of targeted fuel subsidies are likely to undermine spending capacity in the near-term, particularly among middle and higher income households.

“Not helping either are broad inflationary pressures which would unanimously affect overall retail appetite,” it said.

Following these projections, Kenanga has maintained its “neutral” call on the REIT sector.

Despite office spaces becoming increasingly relevant, it warned that overall occupancy levels may remain thin as the incremental supply of new office spaces could outweigh the modestly rising take-up rate.

In the first half of 2023, the National Property Information Centre (Napic) revealed that newly completed structures have contributed an extra 61,000 sq m of office space to the market, which is expected to dampen the appeal of existing excess stock.

Nevertheless, occupancy rates have been steadily increasing, with shopping complex retail spaces reaching a 76.6% utilisation rate, according to the note.

“We believe the industry could benefit from improving appetite for physical retail spending, primarily seen in the prime locations,” it said.

Following the outlook, Kenanga’s top picks for the sector are KLCCP Stapled Group, with a target price (TP) of RM7.18, and Sunway REIT with a TP of RM1.63, as the firm believes their risk-to-reward ratios are favourable.

“We expect KLCCP to remain resilient thanks to its highly prime location and assets which we believe are less susceptible to spending pressures.

“On the other hand, Sunway REIT may have a balanced buffer against sector risk exposures thanks to its diversified assets and strong brand equity,” it further added.

The research house maintains a cautious stance on Axis REIT, the only industrial REIT in its portfolio, due to a noteworthy decrease in occupancy rates, which fell from 95% in December 2022 to 89% in June 2023.

This decrease is projected to significantly impact its earnings, potentially leading to increased short-term uncertainty.

“This decline has had a significant adverse effect on their earnings and may translate to further near-term uncertainty,” it said.

At market close, KLCCP’s share price was unchanged at RM6.76, while Sunway REIT’s unit price was up by one sen (0.68%) at RM1.47. Each with a market capitalisation of RM12.2 billion and RM5.03 billion.

Axis REIT’s units were up by one sen (0.55%), giving it a market capitalisation of RM3.17 billion.