KUALA LUMPUR: Pavilion Real Estate Investment Trust (Pavilion REIT) believes its rental reversion rates, an increase in rental rates to reflect prevailing market conditions, will still be strong despite challenging times ahead due to rising costs.
Chief executive officer Philip Ho said the company may consider passing on some of the increases in operating costs, which include hikes in tariffs and assessment rates and the implementation of the goods and services tax (GST) in April next year, to its tenants.
The company is currently reviewing whether to pass on the added costs to its tenants.
Pavilion REIT, whose properties comprise Pavilion KL and Pavilion Tower valued at RM4.1 billion, recorded a gross revenue of RM375.51 million for the 2013 financial year ended Dec 31 (FY13), an increase of 8.37% or RM28.99 million over 2012. Net property income, meanwhile, rose 7.27% to RM263.13 million.
“We believe our rental reversion rates will still be strong for Pavilion KL with our strong location, good tenant mix, aggressive marketing and strong management team,” Ho said after the company’s annual general meeting yesterday.
Pavilion KL, the retail segment of Pavilion REIT which contributed 97% to gross revenue and net property income, achieved a rental reversion of 15% last year.
For FY13, the company’s utility expenses went up 8.75% to RM43.6 million from the year before. It accounted for about 39% of property expenses last year.
According to Ho, Pavilion REIT is currently undertaking cost reduction initiatives, including the implementation of an energy audit of its air conditioning system for optimum operating efficiency, and conversion of lighting systems to light-emitting diode (LED) which consumes less electricity.
The company anticipates the majority of its asset enhancement initiatives to be completed by the middle of this year, which is expected to contribute positively to the fund’s revenue.
Pavilion REIT is also still eyeing real estate investment opportunities. However, it has not budgeted any amount to date as it has not identified any asset acquisition.
“We are still evaluating potential acquisition but have yet to identify any yield accretive assets as at today,” said Ho, adding that preferable acquisitions are retail related.
Pavilion REIT’s gearing ratio stood at 16.2% as at the end of last year, below the market norm of approximately 35% to 40%. Its cash and cash equivalents balance totalled RM207.6 million.
Ho said in the company’s 2013 annual report that the decision to convert the majority of the fund’s floating rate borrowings to a fixed rate of 4.2% per annum has paid off as borrowing costs have stabilised despite the increasing interest rate environment.
Pavilion REIT said part of its revolving term loan facility of RM705.9 million has been approved to be at a fixed interest for the next three years, maturing Dec 7, 2016. This portion currently represents 99.5% of total outstanding term loan, resulting in the fund saving RM3.5 million of interest expenses during the year.
This article first appeared in The Edge Financial Daily, on March 21, 2014.