Wednesday, December 6

MREITs outlook clouded by oversupply of office, retail spaces in Klang Valley


KUCHING: Malaysian Real Estate Investment Trusts’ (MREITs) outlook is clouded by the oversupply of office and retail spaces in the Klang Valley, placing a dampener on the sector’s prospects, analysts observed in a sector update.

The research arm of Kenanga Investment Bank Bhd
(Kenanga Research) was tepid on the outlook for MREITs going forward.

It noted that this was due to unexciting reversions, up to mid-single-digit for retail to mildly negative reversions for office assets due to competition from oversupply of office and retail spaces.

The research arm also noted that it was due to minimal lease expiries, 14 to 30 per cent of net lettable area (NLA) for MREITs under its coverage, save for Capitaland Malaysia Mall Trust (CMMT) with 45 per cent in financial year 2018 (FY18) which it had accounted for.

“Meanwhile, FY19 will see circa 21 to 53 per cent leases up for expiry for MREITs under our coverage, but due to the oversupply of both office and retail spaces, we believe strong reversions will remain challenging as tenants will prefer to prioritise occupancy over reversions,” Kenanga Research said.

As such, the research arm believed it had accounted for most foreseeable near-term risks, on modest FY18-19E average distribution per unit (DPU) growth of three-two per cent year on year (y-o-y).

On another note, Kenanga Research highlighted that MREITs with landmark assets will fare better than the market.

“To recap, considering oversupply fears, we believe MREITs with landmark assets will fare better than the market with above-average occupancy and positive reversions due to well managed assets.”

It further highlighted that REITs such as Pavilion REIT, IGB REIT, KLCC, Sunway REIT will continue to remain stable from higher footfall traffic, versus neighbourhood malls.

“This enables such assets to retain close to maximum occupancy of 95 to 100 per cent versus domestic retail occupancy of circa 80 per cent and command positive reversions, albeit at a slower growth rate which we have accounted for.”

Kenanga Research pointed out that this is similar for landmark office assets such as KLCC and MRCB-Quill REIT which fare better than the industry average with close to full occupancy of 96 to 100 per cent versus the Klang Valley’s average of circa 80 per cent.

“Additionally, according to Bank Negara’s Financial Stability Review for the first half of 2018 (1H18), banks will be more cautious when lending to the office space and shopping complex segments going forward.

“Although this may not help near-term reversion rates, we believe it is a long-term positive as it helps address the oversupply situation which bodes well for MREITs.”