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MANY retail malls have been seeing an increasing number of empty lots lately, which is certainly not a positive sign. This points towards an oversupply of shopping malls, or even worse, poor business.
A slowdown will not augur well for retail real estate investment trusts (REITs) as their asset portfolios comprise mainly shopping malls. Unoccupied units mean a loss of rental income and shopping malls will find it difficult to raise rent, resulting in slower revenue growth, if not a contraction.
This raises concern about the REITs’ ability to sustain yields.
According to a head of leasing at a popular mall in the Klang Valley, mall operators are starting to see an increase in the number of early termination of retail tenant contracts.
“An increasing number of retailers are requesting early termination of their rental contracts. On top of that, there’s a drop in demand for retail space. Despite that, we are still running close to full occupancy … Whether the decline in demand for retail space will impact the earnings of malls and REITs will depend on the individual mall — how well it manages its tenant and rental portfolio,” says the head of leasing.
“We are maintaining the rent for some tenants, given the current tough operating environment. This is on a case-by-case basis.”
Sunway Real Estate Investment Trust (SunREIT) CEO Datuk Jeffrey Ng (pictured, right) sees the current challenging situation as a case of survival of the fittest.
“In times like this, established regional malls are expected to be resilient, albeit registering slower rental growth, and the new malls will have to identify their market positioning and value proposition to compete in the marketplace. Otherwise, the new malls will face difficulty in achieving optimal occupancy and rent,” he tells The Edge.
According to Ng, SunREIT’s shopping malls are still seeing modest rental growth. “However, we expect rental reversion growth to ease in view of the prevailing weak market sentiment,” he says, declining to divulge more details.
Meanwhile, KLCC Stapled Group stresses that Suria KLCC mall is still enjoying “almost full occupancy”, but it is expecting a challenging outlook due to economic headwinds, both local and global.
“Our current focus is to bring in the right traffic to sustain our retailers’ sales growth. Our retailers have been registering positive year-on-year sales turnover since August 2015 despite the challenging situation. Rental reviews are normally be based on performance and the market [situation],” the REIT says in a written reply.
“The REIT market is expected to remain stable and resilient in 2016. We will continue to focus on our strong fundamentals and financial discipline to remain resilient. Our office rental income will remain resilient as our portfolio consists of long-term leases with triple net lease agreements.
“The retail segment is expected to present a more challenging outlook due to economic volatility, both domestically and globally. The hotel segment will continue to trade in a challenging environment consequent upon the subdued market outlook and tourist arrivals.”
Hong Leong Investment Research says it is turning slightly cautious on the sector this year.
“In view of the prolonged weak consumer sentiment and slower economic growth, we expect slower rental reversion rates for some mall operators. With rental reversions posing a challenge, we believe active asset enhancement initiatives and acquisition activities are the growth drivers in 2016,” it says in a Jan 11 report.
“Furthermore, with the upcoming supply of around 7.4 million sq ft of NLA (to our best knowledge) targeted for 2016/17, we expect [stiff] competition for these new malls in wooing retail tenants. Hence, the less popular ones may feel the heat as the bargaining power shifts to the lessees.” (See table)
Despite the cautious outlook, the research house is maintaining its “buy” call on MRCB-Quill REIT, whose portfolio consists of office blocks and shopping malls, with a target price of RM1.29 given its high dividend yield of 8.4% and proposed asset injection.
Among the retail REITs, it prefers SunREIT — it has a “buy” call on the stock with a target price of RM1.55. It expects SunREIT to see a diversified asset injection by its sponsor, Sunway Bhd.
Fund managers contacted by The Edge say it is worth taking a look at the retail REITs, considering their yield of above 4%, based on their current share prices. “If it is a good shopping mall in a prime location, why not?” says one of the fund managers.
An insurance fund manager, meanwhile, notes that the yields are attractive. Nonetheless, he has an “overweight” on the sector because there are concerns over a decline in consumer spending, which may be more severe than in 2008.
REITs trading at sharp discounts to NAVs
Interestingly, a number of listed REITs were trading at a lower level than their net asset values (NAVs) as at Sept 30, 2015. For instance, IGB REIT was trading at a 58.5% discount to its NAV of RM3.2067, KLCC Stapled Group, at a 4.56% discount to its NAV of RM6.69 and Pavilion, at a 20% discount to its NAV of RM1.56.
SunREIT’s Ng points out that more than half of Malaysian REITs were trading at a significant discount to their NAVs as at Dec 31, 2015.
This, he notes, may prompt privatisation moves as a few of them are substantially undervalued.
“Alternatively, it may trigger mergers and acquisitions where the acquiror instantaneously expands its asset under management by acquiring such REITs,” Ng says.
He adds that in the short term, SunREIT is cautious about the outlook for FY2016 and expects flattish distribution per unit (DPU) growth in view of weak consumer and business sentiment and lower management fees payable in units, from 50% to 25%, for FY2016.
“As the unit price is a determinant of dividend yield and the former is a moving parameter, the dividend yield will vary in accordance with the movement of the unit price,” he says.
“Moving forward, we’ll continue to strive for a DPU CAGR (compound annual growth rate) of 5% over the next five years (FY2016-20), underpinned by growth from Sunway Putra, acquisitions and recovery in the retail and hotel segments.”
Ng also shares that SunREIT is closely monitoring the interest rate direction to grab opportunities to optimise its floating rate debt and fixed rate debt ratios. As at Sept 30, 2015, 87% of SunREIT’s debt was in fixed rates.
This article first appeared in The Edge Malaysia on Jan 18, 2016. Subscribe here for your personal copy.
