Positive rental reversion for popular malls

Investor appetite for risks, it appears, is still somewhat lacklustre as evidenced by the relatively low trading volumes on the local bourse.

Despite some recent upbeat data on the global economic front, perhaps many are still on the sidelines pending greater clarity on the outlook.

The upcoming general election is also likely a sentiment dampener.

This being the case, investors may continue to stick with defensive choices, even though valuations for many have run ahead, or in the extreme, cash. Yields for most of the larger real estate investment trusts (REITs), for instance, have fallen to record low levels.

Among the larger retail-focused REITs, their yields appear to have converged to a rather narrow range. For instance, CapitaMall Malaysia Trust (CMMT) and Pavilion REIT are offering net yields estimated at roughly 4.6% at their prevailing prices.

While REITs do carry risks — as opposed to effectively zero risk bank deposits with PIDM insurance — they also offer the upside potential from positive rental reversions, future yield accretive acquisitions, asset enhancement and appreciation in property value.

Thus, the slightly less risk-averse investors may still be keen to hold some REITs in their portfolios as opposed to cash in the bank. The majority of banks are currently offering interest rates of 3.1% to 3.2% for 12-month fixed deposits.

Mall rental rates still on the rise
Positively, rental rates for popular shopping malls are still on the rise. CMMT saw, on average, 6.7% rental reversion for leases renewed for its four shopping malls in the first nine months of this year. The Gurney Plaza enjoyed rental reversion averaging 12.8%, bolstered by asset enhancement works carried out over the past year.

Meanwhile, newly acquired East Coast Mall registered rental increases of about 12.9%. This mall is expected to see greater upside prospects in the near to medium term, especially once the proposed enhancement works — that will also include about one-quarter more net lettable space — are completed. Refurbishment works are also planned for the Sungei Wang Plaza, which will be undertaken through the better part of 2013.

With frequenting malls being one of the most popular pastimes for Malaysians, shopper traffic is likely to remain robust for the foreseeable future, as are occupancy rates.

Occupancy for CMMT’s portfolio stood at 98.5% at end-September.

Pavilion REIT, too, registered similar occupancy rate of 98.5% at its flagship Pavilion KL Mall. The premium fashion mall enjoyed a strong 10% average rental reversion for leases renewed this year.

Income in the latest third quarter of 2012 (3Q12) was further bolstered by the opening of the Fashion Avenue — a new high fashion precinct transformed from the previous Tangs department store space — in early-September. It will see full-quarter contributions in 4Q12.

With two-thirds of leases (in terms of net lettable area) up for renewal in September 2013, the trust is expected to report continued growth in earnings. Without taking into account any new asset acquisition, distribution per unit is estimated at 6.8 sen and 7.04 sen for 2012/13 respectively, which implies net yields of 4.4% to 4.6% for the two years at the prevailing price of RM1.38.

Room to raise fresh borrowings
Both REITs have room to further leverage their balance sheets to fund new acquisitions. Pavilion REIT’s gearing stands at less than 19%, well below the maximum level of 50% under current trust guidelines. Based on total assets of RM3.7 billion, it could potentially raise up to RM1.1 billion in new borrowings.

Pavilion REIT has the rights of first refusal for two other shopping malls — fahrenheit88 and a neighbourhood mall in Subang Jaya currently under development — as well as for the Pavilion Mall extension.

CMMT’s gearing stood at a higher 28% at end-September — but some 42% of its assets are unemcumbered. Assuming the maximum allowed gearing, the trust could raise up to RM670 million in new debt based on its current total assets of over RM3 billion, although we expect any new purchase will be funded via a combination of debt and equity.

It had previously made two rounds of private placements, for the purchase of Gurney Plaza extension and East Coast Mall. Both purchases had been yield accretive with distribution per unit trending higher. We estimate DPU at roughly 8.48 sen and 8.76 sen for 2012-2013 respectively – translating into net yields of 4.5% to 4.6% at the current price of RM1.70.  

Note: This report is brought to you by Asia Analytica Sdn Bhd, a licensed investment adviser. Please exercise your own judgment or seek professional advice for your specific investment needs. We are not responsible for your investment decisions. Our shareholders, directors and employees may have positions in any of the stocks mentioned.


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