Malaysia Real Estate 
Investment Trust (REITS)
Maintain neutral. The media recently reported that the goods and services tax (GST) will not be imposed on commercial units with rentals of below RM500,000 annually. We believe this announcement is further to the previous declaration that only residential units will be exempted.

This news is slightly positive to retail REITs as it alleviates the additional cost to tenants. Hence it should remove the likelihood that the tenants may demand renegotiation for the lowering of rental fees. 

We expect CapitaMalls Malaysia Trust (CMMT), Pavilion Real Estate Investment Trust  and IGB Real Estate Investment Trust to benefit most due to their bigger exposure to the retail segment against Sunway Real Estate Investment Trust and Axis Real Estate Investment Trust.

Based on our calculations, this means that those tenants with rentals below RM41,700 per month will be exempted from the GST. Assuming a RM15 rental rate per sq ft, this means any tenant with a lot size below 2,780 sq ft will be tax-exempted.

While we are slightly positive on the news, it is not expected to affect REIT players’ earnings and valuation significantly. Hence, we maintain our “neutral” recommendation on the sector.

Although we do not have any “buy” recommendation currently, our preferred stock is CMMT as its net dividend yield of 5.8% is the highest among stocks under our coverage. — MIDF Amanah Research, March 18

This article first appeared in The Edge Financial Daily, on March 19, 2015.