Why RHB is cutting CapitaLand Mall Trust to 'neutral'

SINGAPORE (Jan 23): RHB Research has downgraded CapitaLand Mall Trust from a “buy” to a “neutral” recommendation, amid concerns that its rental growth could be affected by the sluggish retail market.

RHB’s analyst Vijay Natarajan notes that CMT could see rentals grow at just 1% for the year, compared with its 10-year average of 6% growth per annum, on the back of the local retail sector’s structural changes to adapt to the changing retail habits of consumers and the poor economic environment.

In fact, retail sales are already expected to continue its fall, after it fell by 2.1% year-on-year for November 2016.

What’s worse, the supply of retail space will continue to grow by 3.3 million sq ft, or 9% of existing retail space, over the next three years and will likely erode rentals further.

“Amid these challenges, we expect only defensive suburban malls situated in areas with a good catchment population to remain resilient,” said Natarajan in a note on Monday.

To that end, RHB reduced its retail rental growth estimates from 3% to 1% and in turn reduced its full year distribution per unit estimates by 2% for FY2017 and by 4% for FY2018.

That said, the brokerage continues to be positive on the redevelopment of Funan DigitaLife Mall, which closed in July 2016 and is expected to be completed by 4Q2019. With an investment cost of S$560 million, the redeveloped mall will have two office towers, serviced residences and a retail space and could likely start contributing in 2020.

“Retailers need to differentiate and incorporate futuristic elements to keep themselves ahead of the competition to stay relevant,” said Natarajan, who added that recent asset enhancement initiatives (AEIs) at Plaza Singapura and Tampines Mall could also benefit.

Shares in CMT are trading 1.5 Singapore cents lower at S$1.97 on Monday. — theedgemarkets.com.sg