REITs to gain from rate cuts

PETALING JAYA: While the US Federal Reserve (Fed) had surprised few with its third 25-basis-point (bps) rate cut this year, experts diverged on whether asset rotation into Malaysian real estate investment trusts (REITs) due to the lower fund rates is a given.

The US central bank reduced borrowing rates between banks to 3.5% to 3.75% on Dec 10, which followed two identical cuts in September and October, after it had in turn called for a total reduction of 100 bps last year.

This recent rate direction had contributed to the softer US dollar and appreciated the ringgit, while also igniting significant interest over alternative asset classes which of course included equities.

IPP Global Wealth investment strategist and country economist Mohd Sedek Jantan observed that Fed chairman Jerome Powell had delivered yesterday’s rate cut with a distinctly hawkish tone, one that signalled borrowing costs are unlikely to drop further in the near term, with inflation remaining somewhat elevated.

Of interest, Mohd Sedek believes the transmission to Malaysian REITs will be gradual rather than immediate, despite the tradition that REIT valuations tend to move inversely with interest rates.

“In this cycle, however, the relationship is moderated by Malaysia’s stable domestic monetary anchor, with Bank Negara Malaysia (BNM) holding its overnight policy rate (OPR) at 2.75% following its respective 25 bps reduction last July.

“What matters more for REIT valuations is the long end of the yield curve, and the decline in global bond yields will likely exert downward pressure on 10-year MGS (Malaysian Government Securities) yields even if the OPR remains unchanged,” he told StarBiz.

With the Fed–BNM rate gap narrowing, he said the domestic yield curve does not need to mirror US movements fully, but the relative yield spread between Malaysian REITs and sovereign bonds will still widen modestly in favour of REITs.

Mohd Sedek anticipates that sentiment should improve quickly as global investors rotate into yield assets, but the valuation adjustment should play out over the next one to two quarters.

More importantly, he views the current OPR rate as sufficiently stable to reinforce yield predictability, which is supportive for Malaysian REITs even as global easing proceeds cautiously.

Chief investment officer at Tradeview Capital Nixon Wong noted that the Fed rate cut impact on Malaysian REITs depends on the OPR path and MGS yields, to a degree mirroring Mohd Sedek’s sentiments.

If US yields fall and drag global developed market yields lower, Wong said this often eases pressure on emerging market bonds, including MGS, which then improves the relative appeal of REIT yields.

“If lower Fed rates translate to weaker US dollar risk premium, which stabilises the ringgit, then foreign appetite for Malaysia ringgit assets usually improves.

“Ultimately, coming back to fundamentals, distribution per unit uplift and fair-value upgrades are more like a 2026 story, as funding costs gradually decline and valuers ease cap rates on assets,” he said.

Notably, Mohd Sedek pointed to industrial and hospitality REITs being the best positioned to benefit the most from a structurally lower global interest-rate environment, especially when viewed through the policy priorities of the 13th Malaysia Plan (13MP), coupled with the demand uplift associated with Visit Malaysia Year 2026.

He reckons that industrial REITs stand to gain from both lower global discount rates and the strategic thrusts embedded in the 13MP, which emphasise manufacturing upgrading, logistical efficiency and high-value supply-chain integration.

“Lower long-term yields can help compress cap rates, enhance asset valuations and improve acquisition feasibility precisely at a time when Malaysia is doubling down on the electrical and electronics segment, semiconductor support industries, and regional distribution hubs.

“This alignment of global monetary easing with domestic industrial-policy momentum creates a powerful tailwind for the sector,” said Mohd Sedek.

At the same time, he pointed out that hospitality REITs should see the strongest cyclical uplift as global financing conditions ease and Malaysia gears up for Visit Malaysia Year 2026, which is expected to generate a meaningful boost in tourist arrivals, occupancy rates and average room yields.

A more stable ringgit and lower global borrowing costs should reinforce these gains, strengthening the earnings visibility of hotel-focused REITs and asset owners tied to tourism recovery, he added.

“Retail REITs remain supported by resilient domestic consumption, though their rate sensitivity is smaller.

“Upside potential may be enhanced on the margins as 13MP’s focus on urban regeneration and transit-oriented development increases footfall and tenant mix quality over time, but overall rental dynamics remain stable rather than expansionary,” said Mohd Sedek.

Tradeview Capital’s Wong also emphasised that prime assets such as flagship malls in Klang Valley with strong occupancy and decent rental reversions will see higher demand, especially if consumption holds up.

However, from a varying perspective, he said industrial REITs on the other hand tend to offer longer weighted average lease expiry, or Wale, and higher occupancy with built-in step ups on rentals.

Wale is a key metric for REITs that show the average remaining lease term for properties in their portfolio, usually weighted by rental income or area.

A longer Wale suggests more stable income and lower short-term vacancy risk, making it a crucial indicator for investors assessing a REITs cash flow and investment quality

Wong explained that as such, industrial REITs are more sensitive to the yield environment relative to retail REITs, and that fundamentals could be influenced by other factors in the shorter term.

“On the flipside, we believe office REITs are facing structural challenges in this tenant market with limited bargaining power, and hence are facing a higher risk premium. Hospitality REITs are mainly cyclical, so risk premium is high as well,” he said.

Perhaps most crucially, Mohd Sedek is expecting foreign inflows to return gradually into Malaysian REITs, especially as the narrowing US–Malaysia rate differential improves the relative attractiveness of Malaysian yields.

“Malaysian REITs already offer competitive distribution yields, and as US yields drift lower, the base yield spread shifts further in Malaysia’s favour, reducing the opportunity cost for global investors to reallocate into Asian yield assets,” he said.

He feels the key triggers include a clearer conviction that the Fed’s easing path will extend beyond the initial hawkish cut; continued stability in Malaysian bond yields, underpinned by BNM’s commitment to keep the OPR at 2.75%; and stronger earnings visibility, especially in industrial and hospitality REITs where rental trajectories are more robust.

Adopting a more guarded tone, Wong said the rotation of external funds into domestic REITs following the Fed’s latest rate cut is “plausible, but not a given,” as there remains a need to evaluate a combination of macro, foreign exchange (forex) and domestic factors.

He highlighted that foreign investors place a strong emphasis on the forex factor, and if they believe the ringgit is going to depreciate for any reason, they may feel it is pointless to invest into Malaysian REITs even if the yield gap is attractive. As such, he said signs of ringgit stabilisation post-Fed cuts can be a strong trigger.

“Additionally, the visibility of the Fed easing cycle is also essential. If foreign investors price in more cuts in the pipeline, US yields will drift lower, sparking a higher risk appetite for emerging market assets such as Malaysia.

“Last but not least, other emerging markets could offer higher nominal yields with stronger growth stories, pulling capital away from Malaysia,” Wong cautions.