PAVREIT: Malaysian REIT Sector Poised for Growth Amid Robust Domestic Demand and Tourism Boost

The Malaysian Real Estate Investment Trust (REIT) sector is poised for a stable and positive outlook in 2026, maintaining its “Overweight” rating. The Bursa Malaysia REIT Index (KLREI) demonstrated strong performance last year, gaining 8.3% and significantly outperforming the broader KLCI, which rose by 2.7%. This robust performance is underpinned by resilient domestic consumption, a revitalised tourism sector, and expanding industrial demand, all operating within a favourable low-interest rate environment.

Performance Review and Key Drivers

Retail REITs are expected to continue their strong momentum, with key malls achieving near-full occupancy rates and anticipating positive mid-single-digit rental reversions in 2026. The upcoming Visit Malaysia Year 2026 (VMY2026) is highlighted as a significant catalyst, projected to boost tourist footfall, tenant sales, and rental growth, particularly for tourist-heavy malls. Industrial REITs are also thriving, benefiting from long weighted average lease expiries (WALEs) and sustained demand for logistics and warehousing assets. Government policy initiatives, such as the Johor-Singapore Special Economic Zone (JS-SEZ), the New Industrial Master Plan (NIMP 2030), and the National Energy Transition Roadmap (NETR), are set to further stimulate demand for industrial space, particularly in key regions like Klang Valley, Johor, and Penang.

Challenges and Headwinds

Despite the positive sector outlook, potential headwinds include the structural overhang of withholding tax (WHT) treatment on distributions, particularly for foreign funds. While currently under review, the removal of WHT concession could lead to a compression of net yields by approximately 50-100 basis points for affected unitholders. This might prompt marginal foreign capital to rotate towards regional peers with more favourable tax regimes, though domestic investment remains unaffected. Additionally, the office sector continues to face challenges, with occupancy rates in the Klang Valley remaining soft at around 80% due to ongoing new supply and a “flight-to-quality” trend among tenants favouring integrated, transit-linked, and ESG-aligned buildings.

Future Outlook and Strategy

The overall sector outlook for 2026 remains constructive, supported by a stable macroeconomic backdrop, resilient domestic demand, and identifiable catalysts. A stable Overnight Policy Rate (OPR) at 2.75% (post-July 2025 cut) is expected to maintain a conducive financing environment. Furthermore, a potential easing of Malaysian Government Securities (MGS) yields could further enhance the yield differential, supporting asset expansion via debt. The investment bank recommends a selective stock-picking approach, favouring REITs with clear earnings visibility, quality assets, and strategic positioning to capitalise on policy tailwinds. Top picks in the sector include Pavilion REIT, recognised for its tourism exposure and higher floating-rate sensitivity, and AME REIT, a preferred industrial play benefiting from structural growth in Johor.