Early signs of weakness in commercial real estate

Another prime asset that was unscathed by for the year ended Dec 31,2020 was IGB REIT’s two prime assets – the Mid Valley Megamall and The Gardens Mall. Both had no change in their valuation as at the end of the financial year.

WITH the release of Malaysian Real Estate Investment Trust (M-REITs) respective fourth quarter results, we are now able to gauge the impact of Covid-19 on commercial real estate assets in terms of valuation as typically all REITs carry out a valuation exercise on their respective investment properties annually.

Judging by the report cards by listed M-REITs, the most impacted segment seems to be the retail segment as it took the biggest hit in the form of not only lower property income, but at the same time, asset values too were knocked down due to the lower valuation.

However, having said that, not all M-REITs experienced this scenario as some assets were well insulated as their valuation were unchanged or little change.

For example, Pavilion REIT’s Pavilion Tower and the Intermark Mall valuations remained intact, although three other assets did see some form of reduction, in particular Da Men Mall, which experienced some 21.2% drop in valuation.

For KLCC Stapled Group, their assets too were very much intact with little change in valuation but they did recognise RM81.4mil impairment for an investment property under construction, which is in relation to the Kompleks Dayabumi Phase 3.

In addition, Kompleks Dayabumi itself saw its valuation reduced by RM56.5mil or by 9.5%. Suria KLCC saw the biggest reduction among all assets in M-REITs in absolute terms as that prized asset was reduced by RM72mil to RM5.565bil.

However, in terms of percentage, the change in value is almost negligible as it only represents about 1.3% of the total value. Another prime asset that was unscathed by for the year ended Dec 31,2020 was IGB REIT’s two prime assets – the Mid Valley Megamall and The Gardens Mall. Both had no change in their valuation as at the end of the financial year.

In essence, other than the above prime assets, table 1 summarises the valuation perspective of other M-REITs’ assets that were subjected to some form of material adjustment. Material adjustment here is defined as valuation of individual property where the change in value is more than 5% of the net book value as at Dec 31 2020.

However, industrial properties seems to have done well during the economic downturn as we can see not only their performance was mostly unaffected by Covid-19, valuation of their investment properties too improved in 2020.

This includes Axis REIT and Atrium REIT’s revaluation gain of RM19mil and RM2.9mil respectively. Both translated to a gain of about 0.6% of their respective total investment properties’ valuation.

In addition, several isolated properties too saw increase in valuation and this include UOA REIT’s Corporate Tower, which was revalued by about RM16.3mil or 2.3%. Al-Salam REITs had two properties, @Mart Kempas, and MCHM College, both in Johor Bahru, that saw their respective valuation increased by 12.7% and 6.1% or RM3.8mil and RM4mil respectively.

For companies with the year end that was in June last year, several REITs already experienced earlier knock-down in their respective investment properties. This is summarised under table 2.

At the same time, there were some assets that were uplifted in valuation as well and this includes KIP’s AEON Mall Kinta City which had an increase of RM10mil or 4.8% in its valuation.

Similarly for Sunway REITs, some of its assets were also revalued, led by RM56mil or 1.5% gain for its Sunway Pyramid Mall and RM10mil or 1.8% gain for its Sunway University and college campus. YTL Hospitality REITs too saw the valuation of its Malaysian assets mostly firmer, rising by RM15mil or 0.7% for the year ended 30 June 2020.

Investment properties do drop in values

Real estate investments is always seen as a safe haven asset, and over time, the value of these hard assets will appreciate, given the inflation factor, scarcity value and rise in rental rates, which drives capital values. After all, most of the assets held by M-REITs are tilted towards the retail segment which has a tendency to appreciate well over a longer time horizon.

The economic downturn of 2020 on the back of global pandemic has changed the landscape of the property market to a certain extent especially in relation to commercial properties. Some of these changes may be permanent as the new normal is the normal now and hence consumer behaviour too have been altered.

How will this impact valuation of properties going forward will only be known in time as no one is sure whether the rental demand from tenants can be sustained, or whether it will grow or continuously weakened.

For now, we are seeing some early signs of weakness among commercial properties, but not necessarily across the board, as industrial properties seems to be standing out rather well while others, even within the office, retail or hospitality segment are resilient enough to withstand the economic headwinds.

Pankaj C Kumar is a long-time investment analyst. Views expressed here are his own.

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