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HwangDBS: Another RM12bn worth of malls REIT-able

KUALA LUMPUR (Sept 13): There is another RM12 billion worth of prime malls that have Real Estate Investment Trust (REIT) potential, said HwangDBS in a note on Thursday.

The research firm said that while larger retail Malaysian REITs (MREITs) have outperformed the benchmark KLCI and trade at comparable yields to Singapore REITs (SREITs), it expects further upside with two more REITs launching in the second half and beyond at new "benchmark yields".

It believes retail MREITs have stronger growth potential than SREITs given rental reversion of 5% to 8% versus 3% to 4% per annum and more visible acquisition pipeline.

"There is strong gravitation towards REITs for its more diversified resilient retail exposure, higher yields and inflation-hedging," it said.

HwangDBS noted that retail sales in Malaysia have been expanding at a strong eight-year compound annual growth rate (CAGR) of 19%, largely driven by local consumption.

It said despite a slower gross domestic product (GDP) growth and tightening in household debts, private consumption has proven to be resilient and should benefit from positive demographics, rising affluence, increasing tourist spending and government initiatives.

Additionally, rentals are on the rise along with tenants' improved capacity to absorb higher costs, influx of foreign brands and gradual shift to speciality stores.

The house said this would also spur additional revenue growth given turnover rent comprises circa 3% to 5% of total revenues on retail REITs.

"The next major rental revision for key prime malls will be in 2013 to 2014, and should continue to see a healthy uptrend of 10% to 15% over a typical three year lease. Shopping complex occupancy rates increased to 85% despite new mall openings," it said.

Hwang DBS has a preference for retail REITs for diversified exposure to Malaysia's robust retail sales and potential upside from rental reversions, asset enhancements or injections and rising capital values.

It has upgraded its FY2014 earnings forecasts on Sunway REIT and Capital Malls Malaysian Trust assumed injection of sponsor-owned assets, with price targets lifted to RM1.80 and RM2.20 respectively.

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