20 AL-SALĀM REIT MARKET REPORT SUMMARY ANNUAL REPORT 2023 1. ECONOMIC OVERVIEW Malaysia's GDP growth is forecasted at 4.4% for 2024E (2023E: +3.9%), supported by robust consumer spending, investments in infrastructure and recoveries in trade-related services and manufacturing industries. The global economy is expected to grow at a slower pace of +2.8% in 2024 after a +3.3% of expansion in 2023, driven by slower growths in US and China, and ongoing sluggishness in Europe. This global economic shift is reflected in the declining global composite purchasing index, which indicated a consumer transition from goods to services as the economy reopens post Covid-19. ASEAN-6 on the other hand is expected to pick up the pace through measures taken to support the respective domestic economies such as relaxation of visa requirements for foreign travelers. Headwinds in 2024 include global economic shifts, especially in the US and China geostrategic competition that led to geoeconomic fragmentation. The year 2023 ends with two major conflicts, the Russia-Ukraine war and Israel-Palestine war. The market seems to be factoring in the likelihood of an ongoing deadlock in the Russia-Ukraine conflict and a low probability of the Israel-Palestine issue escalating into a broader Middle East crisis. 2023 has been a year of transition to a more stable domestic political environment for Malaysia, which also enables focus on medium to long term transition of the economy. In the year, there has been various notable blueprints and roadmaps such as MADANI Economy, National Energy Transition Roadmap (NETR), New Industrial Master Plan 2030, 12th Malaysia Plan Mid-Term Review, Hydrogen Economy & Technology Roadmap, and Fiscal Responsibility Act and Energy Efficiency & Conservation Act. 2024 is then the year of execution and implementation of the announced blueprints and roadmaps. Fiscal reforms are high on the execution agenda, with the key element being the implementation of targeted rationalisation of fuel subsidy in 2024, together with economic restructuring where the main event is Progressive Wage Policy (PWP), to address the cost-of-living issues, adequacy of retirement savings and equality. Globally, inflation rates have peaked and are seen slowing, signaling the end of the hike cycle for interest rates, with the US Fed keeping the fed funds rate (FFR) at 5.25-5.50%. 2024 FFR outlook is forecasted to have cuts up to 75bps and 100bps in 2025. Bank Negara is also expected to maintain the Overnight Policy Rate at 3.00%. Into 2024, the risk for further weakness in consumer spending cries for additional government subsidy rollbacks. The equity market is set to benefit from stable interest rates and increased foreign direct investment. Corporate earnings are projected to see an upswing. (Extracted from Maybank Report: Malaysia 2024 Outlook and Lookouts) 2. MALAYSIAN REIT 9M23 topline growth for M-REITs under our coverage (+15% YoY) was largely contributed by improved occupancies and strong rental growth from their retail and hospitality assets. Occupancy rose YoY for the sub-segments, led by Hospitality, following the recovery in travel. M-REITs’ growth in revenue was also encouraged by partial income contribution from new assets e.g. at PREIT, CLMT, and AXRB. Bottomline growth (9M23: +5% YoY) was however impacted by higher utilities and finance costs. We remain NEUTRAL on the sector going into 2024. We forecast the sector’s CY24E YoY earnings growth to remain decent at +9.1%, to be supported by sustained occupancy and rental rates, coupled with several new asset injections (i.e. into PREIT, CLMT, SREIT, SENTRAL, AXRB and YTLREIT). Elsewhere, we expect Bank Negara to pause on interest rate, and the OPR to stay at 3% throughout 2024. This will provide respite in terms of higher financing cost experienced in 2023. As at end-Sep 2023, the sector’s floating rate debt exposure was 54%; interest costs in CY23E ranged between 3.8% to 5.4% (CY22: 2.8%-4.3%). With global monetary policy tightening at its tail-end, interest should return to high yielding stocks in 2024. M-REITs currently offer an average CY24E net yield of 6.1%, primarily led by YTLREIT (8.4%) and SENTRAL (7.4%). Meanwhile, the sector’s trailing net yield spread (against the 10Y MGS yield) is at its average of 227bps. Our Fixed Income Research Team expects 10Y MGS yield to lower to 3.50% by end-1H24. This translates into a CY24E net yield spread of 192bps. (Extracted from Maybank Report: Malaysia 2024 Outlook and Lookouts)
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