New 8 Sst On Commercial Rentals Expected To Be Marginally Inflationary Kenanga

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IN EARLY June 2025, the Malaysian government announced the imposition of an 8% SST on rental and leasing services for all commercial spaces, effective 1st July 2025. 

Under this directive, REITs and property landlords will act as collecting agents by billing tenants the SST and remitting the amount to the tax authorities. 
“Given that the tax is applied universally across commercial properties and not specifically targeted at REITowned assets, we expect tenants to pass on the additional cost to end-consumers,” said Kenanga Research.
Typically, rental expenses constitute 15% of total revenue for retail tenants. With the implementation of the 8% SST, the rental component of a tenant’s cost structure would increase from 15% to 16.2%. 
This implies that tenants would hypothetically only need to raise selling prices slightly to offset the additional rental tax, suggesting the overall impact on end-consumers will likely be marginal. 
In the event if tenants are unable to pass through the additional cost to consumers, it will inevitably be more difficult for REIT operators to raise rental rates after tenants are burdened with the 8% increase in rental costs.
“That said, we are mindful that the impending SST hike will not affect all REIT segments equally. Compared to the retail segment, we believe the office and industrial segments are more insulated,” said Kenanga.

This is primarily due to two factors, namely: 
(i) the lower rental-to-revenue ratios among MNC office tenants which typically have stronger financial capacity to absorb incremental costs. 
(ii) the longer lease durations for industrial tenants, averaging between 5 to 10 years, where rental escalations are already locked in.
Retail – Stable mall occupancy. First half of calendar year 2025 (1HCY25) retail occupancy rates in shopping complexes held steady at 79.0% from 2HCY24 from a total retail space of 17.3 mil sqm.

Office – Steady office occupancy. (1HCY25) occupancy rate was broadly stable at 72.0% with a total private office space of 18.5 mil sqm.
Hospitality – Weak 1HCY25 where hotels under our coverage recorded weaker performances YoY mainly due to the full Ramadan season in the quarter where locals tend to host less MICE activities, and have less staycations, coupled with probable down-trading from some high-end hotels to cheaper alternatives in certain tourist groups, likely due to the U.S. tariffs anxiety.
While we do not anticipate strong recovery for the segment in 2HFY25, hoteliers should be partially cushioned on the back of the increased allocation on tourism in the national budget and our in-house projection of 27.7 mil tourist arrivals in Malaysia (+15% increase from 2024). 

We reiterate our Neutral stance on the REIT sector as the upsides appeared to have been adequately priced in by the market following the 25-bps rate cut by the Bank Negara Malaysia in Jun 2025.— Focus Malaysia

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