Malaysian real estate investment trusts (M-REITs) continue to face challenges from the expiration of a longstanding withholding tax concession and rising bond yields, according to RHB Research. Despite these headwinds, the research firm maintains a positive outlook on M-REITs, citing their defensive characteristics and stable income distributions amid ongoing macroeconomic uncertainty.
The withholding tax concession, which previously allowed individual investors to pay a flat 10% tax withheld at source without the need to report it on their tax returns, was discontinued at the start of 2026. Resident individuals now face a filing requirement with progressive tax rates reaching up to 30%, while foreign individual investors are subject to a flat 30% tax rate on earnings from M-REITs.
RHB Research noted that the Bursa Malaysia REIT Index has underperformed the broader market so far this year. However, the firm continues to favor domestic REITs due to their ability to provide stable dividends and serve as defensive assets during uncertain economic periods. The second-quarter results for financial year 2026 (2Q26) largely supported this view, with fundamentals showing improvement and valuations becoming more attractive following a period of de-rating.
The research house maintained an "overweight" rating on REITs, with "buy" recommendations on Pavilion-REIT and Axis-REIT, placing target prices at RM2.18 and RM2.44, respectively. All eight REITs under RHB’s coverage met expectations for 2Q26. On a market-capitalization-weighted basis, these REITs registered a 14.5% year-on-year revenue increase and a 15.6% growth in earnings. However, both revenue and earnings declined by 3.2% and 6.5%, respectively, compared to the previous quarter, primarily due to seasonally softer retail performance.
RHB highlighted Axis-REIT’s strength in the industrial segment, supported by its substantial size and an active pipeline of acquisitions expected to boost earnings in the financial year ending December 31, 2027. Pavilion-REIT was also favored due to sustained demand for prime retail assets and anticipated rental growth derived from the ongoing reconfiguration of Pavilion KL.
The research firm pointed out that despite the rising yields on 10-year Malaysian Government Securities, which currently have a spread of 220 basis points above REIT yields, the recent correction in M-REIT share prices has enhanced overall yield levels, maintaining a relatively attractive spread.
Looking ahead, RHB expects net property income for retail-heavy REITs to stabilize after a strong first half of financial year 2026. However, increases in electricity costs arising from a fuel surcharge introduced in May—replacing a previous rebate system—as well as the July 2025 tariff revision, are likely to temper income growth. Industrial REITs are expected to be less affected due to their lower exposure to utilities.
Monetary policy is also factored into the outlook, with the benchmark overnight policy rate projected to stay at 2.75% through the first half of 2027, although a possible 25 basis point increase could reduce earnings in the same period by about 2%. Overall, RHB anticipates these pressures will remain manageable, with solid leasing fundamentals supporting earnings and dividend stability across M-REITs.