Gradual recovery expected for retail segment under REITs

City centre malls such as KLCC and Pavilion likely to see lower footfall, but well able to weather pandemic compared to second-tier malls

by SHAZNI ONG/ pic by TMR FILE

THE retail segment of real estate investment trusts (REITs) is undergoing a gradual recovery as consumer sentiment picks up amid a challenging year for the industry.

RHB Asset Management Sdn Bhd (RHB AM) head of equity research Petrina Chong said checks and visits to malls within the Klang Valley showed a pick-up in footfall, especially in quality malls with strong market positioning.

“The quality malls especially, you see that they still have the ability to draw crowds and people still come through to do their basic shopping and luxury shopping.

“The Gardens Mall in Mid Valley, there were queues at some of the luxury shops like Louis Vuitton.

“So, it’s quite unique to see that despite everything that’s happening, you have that sort of demand coming through,” she said in a webinar titled “Investing in REITs Risk or Opportunity” organised by RHB AM yesterday.

Chong said city centre malls such as KLCC and Pavilion are likely to see lower footfall compared to suburban flagship malls due to lack of tourist arrivals. Foreign visitors make up about 20% of daily shopper traffic.

Still, she believes these malls will be able to weather the pandemic compared to second-tier malls.

For the hospitality segment, Chong said even pre-Movement Control Order (MCO), the industry started suffering earlier than others due to a lack of Chinese tourists, especially when Covid-19 cases were increasing in China.

Following the implementation of the MCO on March 18, Chong, citing data from the Malaysian Association of Hotels, said hotels suffered from low occupancy rate this year plunging to only 20+%, compared to an average 60% to 65% last year, on top of losses incurred in food and beverage and banqueting businesses.

“Some of the hotels in the Kuala Lumpur (KL) city centre have been used as quarantine rooms, so you do have some occupancy there.

Still, it not as the same as what it was before.

“That said, we have a lot of people who are doing staycations. So, you have some (occupancy) that are coming through in July and August numbers. We do expect some recovery there as well,” Chong added.

For the commercial segment, she does not expect the pandemic impact to be as immediate as it is for retail and hospitality.

The work-from-home arrangements, she said, poses the question whether office space will remain relevant under the new normal.

“Office buildings were already facing cannibalisation impact from newer buildings which offer better facilities and corporations have also been streamlining their businesses which results in less office space needed.

“We see tenant retention to be the main strategy, given the current market situation, with lower rentals expected for older buildings.”

On the performance of the REITs, comparing the KL REIT Index and the main FTSE Bursa Malaysia KLCI (FBM KLCI) in the past, Chong observed REITS are typically slightly more defensive and not as volatile in terms of the movement versus FBM KLCI.

“However, that changed in March this year, it declined more significantly. This, I guess is not a characteristic you’d expect of REITs globally.

“But within the Malaysian space, because of the high proportions of REITs that are retail-based and given what’s happening with the pandemic, there is definitely a concern in terms of the earnings for the REITs within the space. So, that’s why the performance of REITs was impacted by that,” she explained.