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KUALA LUMPUR (March 24): The removal of a longstanding tax concession on real estate investment trusts (REITs) is expected to trigger near-term repricing across the sector, as investors adjust to a new regime that reshapes after-tax returns.
Hong Leong Investment Bank (HLIB) said the cessation of the flat 10% withholding tax (WHT), effective from the 2026 assessment year, introduces a more complex and less favourable framework for many investors.
Resident individuals will now be taxed based on progressive income tax rates of between 0% and 30%, while non-residents face a higher flat rate of 30%.
This shift is expected to widen disparities in after-tax yields, benefitting lower-income investors but weighing on higher-income groups, who could see effective tax rates rise to as much as 20%–30%, compared with the previous 10%.
“Given that a significant portion of the investable base is subject to higher effective tax rates, the overall impact is skewed negatively, in our view. As such, the efficiency of yield transmission declines, with investors retaining a smaller portion of incremental yield relative to previously, particularly for those in higher tax bands. This suggests a larger near-term adjustment in headline yields may be required during the repricing phase, although yields are expected to stabilise over time,” the research house said in a note on Tuesday.
The change is also expected to dampen incremental demand for REITs in the near term, as reduced net yields make the asset class less compelling relative to alternatives.
This could result in some capital rotation, although HLIB does not anticipate a disorderly sell-off given that absolute yields remain attractive.
The research house expects the current weakness to be a temporary repricing phase rather than a structural shift, with yields likely to stabilise once the market adjusts to the new tax regime.
Among its top picks, Pavilion REIT (KL:PAVREIT)(target price/TP: RM2.02) remains favoured on the back of a recovery in tourism-driven retail spending, while Axis REITS (KL:AXREIT)(TP: RM2.25) is supported by its acquisition pipeline and exposure to Johor’s growth themes. Sunway REIT (KL:SUNREIT)(TP: RM2.52) was also upgraded to “buy” following recent price weakness.
Importantly, the tax revision does not affect REIT operations. Earnings are expected to remain supported by rental reversions and acquisitions, while payout ratios typically above 90% leave little room for operators to offset tax impacts through higher distributions.
Despite near-term headwinds, HLIB maintained its “overweight” stance on the sector, citing its defensive characteristics, resilient income profile, and a supportive interest rate environment.
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