Investments into Malaysian real estate investment trusts (M-REITs) are being limited by lacklustre retail sales and worries over the current supply glut of commercial properties.

According to UOB Kay Hian Research, "we still believe that the oversupply of office malls and retail space is far from over. However, we think that the niche office building and prime retail mall segments will remain resilient in the long term.”

In particular, it has advised investors to purchase shares in IGB REIT, which has a target price of RM1.86 apiece. It thinks the trust has the lowest earnings risk for having a strong rental reversion and the best retail sales among the REITs it monitors.

The research house also changed its "buy” call for MRCB-Quill REIT to "hold” given the upswing in share price. "We still like the company for its built-to-suit strategy which allows it to lock in tenants for a longer period and shields it from the office oversupply issue" it noted.

Despite the fears over the oversupply of office space and malls, most M-REITs tracked by UOB Kay Hian Research recorded a "decent” gain in core earnings for Q2 2017.

"Apart from CapitaLand Malaysia Mall Trust (CMMT) and Pavilion REIT, all REITs under our coverage reported year-on-year growth in core net profit (excluding fair value gains) averaging 7.4 percent”.

MRCB-Quill REIT recorded the highest increase of 43.3 percent on the back of newly recognised revenue from the recently purchased Menara Shell property.

On the other hand, Pavilion REIT posted a significant drop in net profit of 8.7 percent. This is attributed to lower occupancy in Pavilion Mall as a major tenant relocated to Pavilion Elite extension.

Nevertheless, the trust plans to pay RM580 million to acquire the newly completed Pavilion Extension, a 10-storey shopping centre adjacent to Pavilion Mall, along with the subway linkage and extension connection.

"Assuming the acquisition is completed by end-2017, we estimate Pavilion REIT's bottom line could improve by 15 percent in 2018. This is premised on the assumption that 241,929 sq ft of net lettable area at Pavilion Extension will be rented out at an average rate of RM18 per sq ft" added the research house.