KUALA LUMPUR: Hong Leong Investment Bank Bhd (HLIB Research) expects Malaysia's retail and hotel segments of the real estate investment trust (REIT) sector to continue to show improvement.

The research firm said this is supported by disposable income boosters from Employees Provident Fund (EPF) Account 3 and a civil servant pay hike, besides a low unemployment rate with steady wage growth and higher tourist arrivals that contribute to higher shopper footfall and retail spending.

It maintained a "neutral" call on the REIT sector as the risk-to-reward profile remains balanced.

HLIB's top picks for the sector remain Sunway REIT (with a target price of RM1.94) and Pavilion REIT (with a target price of RM1.63).

It said Malaysia's latest retail sales data continues to show improvement from the lows seen during the pandemic and is likely to continue on this uptrend due to the government's income initiatives.

HLIB added that the two key initiatives announced in the second quarter of this year would be a booster to disposable income, which are the launch of the flexible EPF Account 3 and an increase of 13 percent in civil servant pay in December 2024.

The firm also said Malaysia's unemployment rate has also remained low while wage growth has been steady.

"We believe that these factors are likely to boost private consumption and spur more retail spending, resulting in higher shopper footfall and tenancy sales.

"Nonetheless, we also note that the additional retail supply entering the market this year, which is Warisan Merdeka Mall @ 118 and Pavilion Damansara Heights Phase 2, could have a dampening effect on rental reversions for existing prime malls," it added.

Meanwhile, HLIB said the hotels will be supported by higher tourist arrivals, as they reached 5.8 million in the first quarter of 2024, whereas the government set a target of 27.3 million tourists and RM102.7 billion in tourist receipts this year.

"With tourist arrivals set to continue improving this year on the back of the recent extension of visa-free travel for Chinese tourists and the reinstatement of global flight capacity, prime malls in Greater KL are poised to receive an additional boost from higher tourist footfall and spending," it added.

As the overnight policy rate (OPR) is expected to remain unchanged at 3.0 per cent this year, as well as a lack of any sector-wide catalysts to meaningfully enhance the earnings and dividend yield of KLREI, HLIB said the yield spread should see limited room for sharp expansion.

"Hence, we retain our 4.0 per cent 10-year Malaysian Government Bond (MAGY10YR) yield assumption for all REITs under our coverage," it said.