PETALING JAYA: The return of Chinese tourists to Malaysia is set to benefit the retail and hospitality segments.
Hence, both the retail real estate investment trusts (REITs) and hotel REITs such as Sunway-REIT, KLCCP Stapled Group and Pavilion-REIT are likely to benefit from the influx of tourist arrivals into the country.
Foreigners typically make up about 5% to 30% of total footfall in malls and about 40% to 70% of hotel guests, said UOB Kay Hian (UOBKH) Research.
Having said that, the research house said REITs under its coverage should reach pre-pandemic levels as it forecasts the sector to deliver 5% and 3% earnings growth in 2023 and 2024 respectively.
It prefers the retail segment, particularly prime and niche malls for their proven business resilience. Moreover, the increasing number of international tourist arrivals would benefit the retail segment.
UOBKH has “buy” calls for Axis-REIT, Pavilion-REIT and Sunway-REIT.
Its top pick is Sunway-REIT, as it is set to benefit from the reopening of borders.
As for short to medium-term interest rates and inflation headwinds, UOBKH Research believes the impact would be manageable, given REITs’ healthy gearing levels (37% on average) and earnings recovery (2022: plus 38% year-on-year (y-o-y); 2023: plus 5% y-o-y).
An interest rate hike’s impact to earnings is at most 3% for every 25 basis points increase.
Gearing levels are also well below the threshold of 50%, at 37% on average.
Moreover, UOBKH Research said the majority of debts taken on by REITs are on fixed financing rates (61% of total debts on average).
It made no changes to its earnings forecast as it assumed there will be minimal to almost no rental assistance and 1% to 2% rental reversion for 2023 and 2024.
The research house did not discount the fact that retailers may need some assistance if the recovery is slower than expected.
It cited risks to its call being prolonged high inflation, which may dampen sentiment and higher than expected rental assistance.
It said the fourth quarter 2022 financial results should be better quarter-on-quarter, on the back of the holiday season, Christmas festivities and upfront shopping being done as Lunar New Year falls on Jan 23.
Moreover, tenant take-up and footfall have sustained their recovery momentum since December 2021, with footfall at about 80% of pre-pandemic levels, UOBKH Research added.