KUALA LUMPUR: Office occupancy and rental rates in the Klang Valley have remained relatively stable this year, despite the addition of new commercial buildings in the first half of 2024 (1H 2024).

According to Kenanga Research, the occupancy rate in Q1 2024 was 72 per cent, a slight increase from 71.9 per cent in the previous quarter.

High-growth sectors such as technology and finance are driving demand for office spaces, but the market remains imbalanced, it noted.

Five new office buildings, including Felcra Tower and The Exchange TRX office by Lendlease, were scheduled to be completed in 1H 2024, adding about 1.4 million square feet to the Klang Valley's existing stock.

Regarding real estate investment trusts (REITs), Kenanga pointed out that they are not the best alternative to holding cash, maintaining a 'neutral' stance on the sector.

The retail REIT sector is facing challenges due to the recent increase in the sales and service tax (SST) to 8.0 per cent, weak consumer spending, sustained elevated inflation, and fuel subsidy rationalisation. However, these issues are partially mitigated by the impending 13 per cent pay rise for most civil servants, the deferment of the luxury goods tax, and the return of international tourists.

Despite concerns over weak consumer spending, the recent pay rise for civil servants is expected to partially restore their spending power.

Kenanga expressed a preference for retail REITs with malls in strategic locations while remaining cautious about the office segment.

The firm's top sector picks are KLCC Real Estate Investment Trust, with an 'outperform' rating and a target price (TP) of RM8, and Pavilion REIT, with an 'outperform' rating and a TP of RM1.59.

Kenanga also noted that two new malls are set to open in 2H 2025, including Pavilion Damansara Heights (Phase 2) and 118 Mall. These openings follow the launch of The Exchange TRX and Pavilion Damansara Heights (Phase 1) in 2H 2023.

Retail occupancy rates have been maintained, with a slight increase in rental rates.

In Q1 2024, retail occupancy rates were 77.6 per cent, up from 76.4 per cent in Q4 2023. Rental rates among retail REITs have increased by about 3.0 percent year-on-year.

"We do not expect Bank Negara Malaysia to cut its current overnight policy rate of 3.0 per cent this year. Therefore, we do not foresee yield seekers returning to REITs en masse," the firm said.

RHB Research prefers REITs with more inorganic growth prospects, like Axis REIT and Sunway REIT.

"We like Sunway REIT for its diverse property portfolio and active acquisition strategy. Axis REIT is our pick due to the resilient industrial sub-sector.

"For the sector as a whole, REITs remain a stronger defensive yield play in 2025 given the stable economic and rental growth outlook, while the market is still waiting for the interest rate cuts to begin in the region," it said.

RHB said there are opportunities within the office segment.

While the outlook for the office sector remains challenging due to the supply-demand imbalance, Sentral REIT is attractive for its high dividend yield, it said.

"While occupancy rates may fluctuate as tenants move around, we think earnings would be sufficiently supported by its stronger office assets, especially following the acquisition of Menara CelcomDigi in December 2023," it said.