CMCO may impact recovery of REITs

CGS-CIMB predicted a cautious recovery outlook in the second half of 2020 for the retail malls and hotel players and had retained its “neutral” stance on the REIT sector.

PETALING JAYA: Consumer sentiment and domestic travel patterns are likely to turn more cautious after the re-implementation of conditional movement control order (CMCO) and this will have an impact on the recovery of retail and hotel real estate investment trusts (REITs).

CGS-CIMB predicted a cautious recovery outlook in the second half of 2020 for the retail malls and hotel players and had retained its “neutral” stance on the REIT sector.

It also pointed out the downside risks of the extension of the CMCO beyond the current two-week period, saying there would be severe negative rental reversion for retail malls, and more subdued occupancy rates for hotels.

The upside risk, however, would be a strong recovery post-CMCO.

It has retained an “add’’ for Axis REIT led by positive rental reversion outlook (financial year 2020: +2%) and asset acquisition pipeline.

For IGB REIT, it maintained an “add, ” as its flagship neighbourhood malls are likely to stage a resilient but gradual recovery post-CMCO.

The research house said it anticipated a stunted recovery in retail mall footfall and tenant sales, as the CMCO poured cold water on the encouraging recovery statistics since July.

It added that based on its checks, retail mall footfall, on average, staged a 60%-80% recovery rate versus the pre-MCO period in the first quarter of 2020.

As for tenant sales, CGS-CIMB anticipated a weakening tenant sales trend in the second half, on the back of the recent Covid-19 cases found at a number of malls in the Klang Valley.

The general observations by retail mall REITs indicate that the tenant sales recovery rate peaked around end-August but was still roughly below the levels seen pre-MCO in the first quarter 2020.

It believed CapitalLand Malaysia Mall Trust would be most affected by the CMCO as retail malls make up 96% of its net property income (NPI) – downside risks to the NPI of its underperforming Klang Valley malls in the second half.

As for travel, CGS-CIMB said that since early October, domestic travel patterns have begun to revert to a more cautious stance.

The outlook for the hotel sector is expected to turn negative in the second half, given the resurgence of Covid-19 cases.

The hotel sector may lose up to RM100mil in the the second half on the back of a 10%-15% fall in room bookings.

CGS-CIMB said occupancy rates remained subdued and may fall to 20%-25%, from about 39% currently.

This may pose downside risks to earnings of Sunway REIT as hotel assets make up 16% of its NPI. For KLCCP, there may be risks of wider losses for Mandarin Oriental KL – its sole hotel asset, the research house said.