Data points to subdued prospects on lack of concrete growth catalysts
AFTER a stellar 2016 in the face of a weak broader market, shares of real estate investment trusts (REITs) may turn sluggish this year due to a lack of concrete growth catalysts and growing fundamental headwinds, say analysts.
The National Property Information Centre’s (Napic) recently released Malaysian Property Market Report 2016 revealed a few reasons for property managers to be concerned.
While Klang Valley’s retail market remained stable during the year with landmark malls continuing to command the highest rentals, the prospect of rental reversion growth is minimal as average occupancy rates failed to show improvement on a year-on-year (y-o-y) basis.
“Top-tier malls such as Suria KLCC and Sunway Pyramid will continue to outperform. But second-tier malls may struggle to hold on to their tenants this year, let alone raise their rentals. In places like Petaling Jaya, for example, we are seeing new malls being built so close to each other,” says one property consultant.
To give one example, there are currently four major malls that are operating within a two-kilometre radius from Damansara Utama in Petaling Jaya – Tropicana City Mall, Atria Shopping Complex, The Starling and GLO Damansara. This cluster of retail spaces in the same neighbourhood may lead to a dispersion in footfalls, given that customers are spoilt for choice.
In fact, the highest sustained volume in footfalls continue to be seen in 1Utama Shopping Centre where rentals go for as high as RM600 per sq m. The shopping complex in Bandar Utama is just a five minutes’ drive from Damansara Utama and is estimated to receive some 120,000 visitors a day on weekends.
According to Napic, the average occupancy rate for shopping malls in Kuala Lumpur declined to 86.9% in 2016, marking a third consecutive year of declines. Total retail space grew to a new high of 2.85 million sq m, or a fourth consecutive year of increasing supply.
“Rental reversion growth is expected to be moderate-to-low for all sub-sectors. Retail rents and occupancy should remain resilient at prime locations, but weak consumer sentiment and spending will cap rental reversion,” says AllianceDBS Research in a recent note. The firm has a “neutral” rating on the sector.
The outlook is more subdued for REITs that have exposure to office spaces. Occupancy rates fell for a third straight year to 77.9% from total available space of 8.66 million sq m. According to Napic, landmark properties that were completed in 2015 such as TH Platinum, Naza Tower and Ilham Tower continued to see low occupancy last year.
At the same time, refurbished buildings will eventually add up to the current office supply glut in Kuala Lumpur. One example is KLCC Property Holdings Bhd’s Kompleks Dayabumi, which is expected to add in about 3,250 sq m into the market once completed.
AllianceDBS highlighted softer market conditions as an added threat. The research house notes that a weaker general economy, a continuing depreciation in the ringgit and minimum wage hikes will pressure rents for office spaces.
From an equities standpoint, REITs are a mixed bag in terms of share price performance this year. However, 11 out of 18 REITs are showing gains to date with returns of between 2% and 10%.
Office REITs surprisingly were among the top gainers with Tower REIT and MRCB-Quill Reit showing gains of 6.66% and 5.83% respectively. IGB REIT leads the way in the retail segment with a 7.62% gain following a strong set of earnings in its latest set of results.
Yields remain decent at a range of between 5% and 7% for most retail and office oriented REITs, according to Bloomberg data.
Conversely, shares of Sunway REIT, one of the largest and most profitable players in the sector, are essentially flat on a year-to-date basis as at April 20. This may have been due to its frontrunner status last year as the REIT outperformed its peers due to steady rental income from its retail assets as well as from having a more diverse portfolio exposure which includes the healthcare segment.
However, share price gains alone do not tell the whole story. MRCB-Quill REIT’s distributable gains (DPU) remain flat at 8.4 sen per unit y-o-y while Tower REIT’s DPU was also flat y-o-y at 6.93 sen.
While the office REIT have shown commendable performances despite the tough conditions, the worsening supply glut may loom large over the property managers’ ability to grow their rental income. This may leave them dependent on new acquisition activity to boost growth or from further asset injections from those with parent companies.
“People bought into REITs last year as a hedge against the market volatility. This year, the main themes are market stability and earnings growth, but the oversupply issue is not going to be resolved anytime soon,” says one analyst.
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