Malaysia's real estate investment trusts' (REITs) outlook have been viewed positively by analysts as the sector is expected to remain resilient from strong earnings, several near-term inorganic growth, and strong domestic liquidity.
Maybank Investment Bank Bhd's research arm (Maybank IB Research) highlighted this in a recent report and viewed, in the near term, it expected the sector's earnings and dividends to be largely supported by prime, retail assets with strategic locations such as Suria KLCC, Mid Valley Megamall, Sunway Pyramid, Pavilion Mall) and office towers with long term tenants (Petronas Twin Towers, Menara 3 Petronas, Platinum Sentral, Menara Shell).
"We remain positive on the sector, premised on resilient earnings which have sustained dividend per unit (DPU) growths and payouts, several near-term inorganic growth opportunities (Pavilion Elite, asset(s) from SunREIT's parents) which could be earnings per unit (EPU) and DPU accretive, and strong domestic liquidity" it opined.
Meanwhile, it believed that mergers and acquisition (M&A) activities in the sector could pick up in 2017 to 2018.
It explained, "We expect 2017 to 2018 sector earnings growth of 6.1 and 4.8 per cent year-on-year (y-o-y) to be supported by sustained occupancy and rental rates, coupled with several potential asset injections.
"Sunway Real Estate Investment Trust (SunREIT) remains as our preferred M-REIT for M&A activities based on its parent's maturing assets (the stabilisation of SunREIT's newer assets which are Sunway Putra Mall supports forward M&As).
"We also expect Axis REIT (AXRB) to maintain its active acquisition strategy of small to mid-size industrial assets" it added.
Aside from that, it noted that it expect slow but steady growth for the office segment.
"Key office assets were largely stable whereby KLCCP and MQREIT have sustained their blended occupancies of 97 per cent respectively in 1QCY17 due to their tenants' long-term leases.
"However, KLCCP's ExxonMobil had a temporary dip in office occupancy due to renewal of only 60 per cent of Menara ExxonMobil's NLA (compared with 100 percent) upon tenancy expiry in January 2017.
"Meanwhile, we saw a strong 1Q17 core earnings growth of 52 per cent y-o-y from MQREIT due to Menara Shell's sizeable earnings contribution since December 2016" it said.
As for the sector's 1Q performance, Maybank IB Research noted that all results were in line, with the average EPU growth was 2.1 per cent y-o-y.
"Earnings were mainly supported by sustained occupancy rates and positive rental reversions which were more apparent at the prime shopping malls" it added.
It noted that most prime shopping malls have maintained rental income growth in 1Q17, largely supported by their strategic and prominent location, sustained rental and occupancy rates, and decent tenant sales growth. 1Q17 occupancies across prime malls were mostly stable (93 to 100 percent).
"However, minor occupancy weaknesses were seen at Suria KLCC and Pavilion Mall due to their tenants repositioning exercises which have temporarily dampened rental income and occupancy rates" it added.
Overall, it expected gradual occupancy stabilisation in 2H17.
"1QCY17 tenant sales y-o-y growth at prime malls in the Klang Valley have remained commendable such Suria KLCC (10 per cent), Mid Valley Megamall and the Gardens Mall (positive, single-digit), and Sunway Pyramid (three per cent).
"This, in turn, could sustain near-term positive rental reversions and tenants retention rates. We understand that prime malls are still maintaining their single-digit positive rental reversions in 2017" the research team added.