AL-SALAM REIT ANNUAL REPORT 2020

55 ANNUAL REPORT 2020 MARKET REPORT SUMMARY 1. ECONOMIC OVERVIEW We expect the Malaysian economy to grow +5.1% in 2021 after the 5.4% contraction in 2020. But there are speed bumps on the road to recovery as Malaysia is going through its third wave of COVID-19 infections, thus the re imposition of restrictions. This necessitates continued monetary and fiscal stimulus, including BNM keeping the record low OPR and Government maintaining large deficit spending in 2021. Availability of COVID-19 vaccines starting 1Q 2021 is an extra stimulus for the economy, plus potential upside from relocation FDI amid the supply chain security, resilience and regionalization arising from US China tension, pandemic and Regional Comprehensive Economic Partnership (RCEP). Domestic political uncertainty and instability remains a major overhang as the Government’s thin Parliament majority makes a snap general election ahead of mid 2023 a possibility. We are also keeping an eye on the economic “scarring effect” of the pandemic which may well be currently masked or delayed as financial and fiscal relief measures are extended into 2021. For Malaysia equities, the multiple COVID-19 vaccine breakthroughs announced from early November, and the expedited approvals and distribution in major economies from Dec, is a game changer. While pandemic accelerated structural shifts will continue to underpin tech led growth stocks, 2021’s “Goldilocks” combination of continuing fiscal and monetary stimulus, even as earnings growth recovers with accelerated economic re openings, is ideal for re rating global cyclical plays, especially value stocks heavy emerging markets which are enjoying the additional tailwind of a weakening USD. While Malaysia’s recovery story is shadowed by political uncertainties and fiscal stress, these are unlikely to derail equities favouring combination of sequential earnings recovery and the supporting factors of i) a resilient banking sector set to deliver an earnings rebound vis à vis ample liquidity, capital; ii) infrastructure stimulus per record gross development expenditure allocation; iii) BNM’s ability to tap multiple policy levers to support economic recovery; iv) rebounding commodities prices re the key exports and fiscal drivers of crude oil and CPO; and v) asset reallocation flows out of fixed income per MKE’s mildly bearish outlook on MGS as demand supply dynamics weaken. Re thematics, there are tentative signs of GLC restructuring; however, structurally, dividend yield and supply chain relocation are more cogent. (Extracted from Maybank Economic Report 2020: Malaysia 2021 Outlooks and Lookouts) 2. MALAYSIAN REIT 2020 has been an exceptionally challenging year for M-REITs due to the COVID-19 pandemic which has deeply impacted M-REITs with high exposure to retail and hospitality assets. The lower FY20 earnings (YoY) were mainly impacted by rental support, softer occupancy rates (selected properties) and drop in non-rental income (i.e. car park, advertising). The sector’s 2020 YTD average unit price has fallen by 14%. Meanwhile, 2020 YTD, Bank Negara has cut the Overnight Policy Rate (OPR) 4 times (Jan, Mar, May and Jul) in view of weakened global economic conditions due to the pandemic - lowering Nov 2019’s OPR of 3.00% down to 1.75%. Consequently, 10-year MGS yield has eased to 2.75% (end-Nov 2020), vs. 3.30% as at end-2019. We expect a better YoY earnings for M-REITs in 2021, albeit limited - namely for M-REITs with exposure to retail and hotel assets. This would be mainly attributed to absence of major rental assistance and/or waiver and gradual but limited recovery of footfall traffic and tenant sales. Nevertheless, we expect retail mall to continue providing rental support to selected struggling tenants. Meanwhile, we anticipate near-term outlook for hotels to remain challenging due to absence of foreign tourists/travelers. Due to the ongoing pandemic-related measures and limitations, we also expect minimal/no major MICE events in 2021. Separately, the current lower interest rate environment would entail cheaper financing costs for selected borrowings. We expect the acquisition pipeline to gradually pick up throughout 2021-2022, as compared to 2020 which has fewer property acquisitions (i.e. by Axis and SunREIT) due to the pandemic which has resulted in delays and uncertainties in the commercial property market. Our 2021 forecasts have only imputed several industrial property acquisitions by Axis. Beyond the near-term, we continue to favour prime malls with prominent locations, and office and industrial assets with long-term tenants. (Extracted from Maybank Economic Report 2020: Malaysia 2021 Outlooks and Lookouts) 3. RETAIL The number of retail malls mushrooming in Iskandar Malaysia for the past two to three years intensified the competition to retain tenants. The supply of retail space in Iskandar Malaysia is approximately 22 million square feet in 2020 after the entrance of one (1) new mall i.e. Paragon Market Place, with 156,000 square feet of retail space and TF Value Mart as the anchor tenant. The cross border travel ban has crippled the retail market in the region severely, especially due to the heavy reliance on cross border shoppers i.e. Singaporeans.