REITs’ rental reversion expected to be flat in 2018


Real estate investment trust (REIT) operators’ plans to boost earnings may hit a snag as the softer retail sector and the entry of new supplies will give tenants the upper hand to negotiate acceptable lease terms.

REITs have been recording steady income growth over the years and rental revision provides the additional and almost secured add-on revenue.

But the glut faced by the industry could well force some of the REIT operators, especially with the less popular assets, to agree to a lower rental-rate hike.

TA Securities Holdings Bhd analyst Thiam Chiann Wen said the glut in the commercial segment gives retailers the bargaining chip in rental negotiations.

“This sentiment will probably continue throughout 2018. The industry can expect a stable rental reversion, but nothing near the double-digit growth as there are still market dislocations in the sector,” she told The Malaysian Reserve.

Thiam said listed REITs with established assets in strategic and prime locations would generate reasonable returns, especially with the move to temporary ban new luxury developments priced above RM1 million.

Overbuilding, absence of strategic analysis on demand and supply, and speculative buying have resulted in excessive construction of commercial centres and retail malls.

Some segments of the property sector have previously demanded authorities to put a stop to new malls and commercial properties as supplies spiral, but demand remains muted.

Developers are adding retail centres into their master plan to add value to their property development project.

However, in the last few years, many of these shops were left untenanted. Lower footfalls, less consumer spending and rising attraction to the cheaper products online are hurting retailers, subsequently forcing them to abandon their retail premise.

But Thiam said, the government’s move to review new luxury development on a case-tocase basis has instilled some confidence back into the market.

“However, developments which are under construction remains a major concern to the sector, as it may add further pressure to the surplus,” she said.

There are 18-listed REITs at the local bourse. These REITs have posted mixed results with the more established assets like Pavilion REIT posted a strong set of figures, but other operators have recorded almost flat results.

Nawawi Tie Leung Property Consultants Sdn Bhd latest data showed that investment sales for REITs dropped to RM800m in the fourth quarter of 2017 (4Q17) from RM1.55 billion in 3Q17, representing a 52% decline quarter-on-quarter.

As at January 2018, a few listed REITs have announced a stable rental reversion outlook at between 6% and 8% for this year.

Axis REIT aimed to maintain its rental reversion of between 6% and 8% on above 90% occupancy rate for all its assets for the financial year 2018.

Pavilion REIT has targeted about 5% to 6% of rental rate growth for 2017 and 2018 respectively, with some 17% of its tenants due for rental reversion in 2017 while 19% are due in 2018.

Thiam said a number of REITs are embarking or in the planning stages to develop green-tier projects to enhance greater value of their asset classes.

“They are either doing it through direct investments, or real estate purchases. This movement is seen to be the next trend moving forward for REITs in order to survive the current challenging market conditions,” she added.

Meanwhile, Thiam said the sentiment for the sector is likely to be affected on the recent Overnight Policy Rate (OPR) hike, despite a steady operational outlook.

“But, the current OPR level of 3.25% is expected to create a fluctuation between yields and asset value, translating into demands for higher returns.

“However, the actual impact on interest expense would be minimal as most of the REITs are operating at an 80% fixed trade borrowings,” she said.