Mall closures to put a dent on REIT earnings

by NUR HANANI AZMAN / pic by RAZAK GHAZALI

THE spread of Covid-19 infections and enforcement of controlled movement are set to impact shopping malls and likely dent earnings for real estate investment trusts (REITs) for the current quarter, analysts said.

Hong Leong Investment Bank Bhd (HLIB) research analyst Nazira Abdullah said tenant sales would be affected by the drop in footfall at malls which have to shutter upon the confirmation of a positive Covid-19 case.

“If malls are impacted by targeted lockdowns or closures due to new clusters found, REIT managers may be inclined to help their tenants out via rental rebates, putting a dent to REITs’ earnings.

“Hotels, too, will be negatively hit as the short-lived pent-up demand for domestic tourism takes a backseat,” she told The Malaysian Reserve (TMR) in an email reply.

1 Utama Shopping Complex was ordered to close from Oct 11 by the Selangor state government, after four Covid-19 cases were discovered on its premises.

Bangsar Shopping Centre (BSC) was closed from 8pm on Sunday for disinfection work after a staff member at an outlet tested positive for Covid-19. BSC resumed its regular operating hours yesterday.

The Gardens Mall (TGM) and Mid Valley Megamall (MVM) on Sunday also confirmed that a staff member at one of their retail outlets had tested positive for Covid-19.

The staff is an employee of London Sales Cosmetics Sdn Bhd (LSC), which operates Origani and Élévatione Time Stops in TGM, and Surreal by Élévatione Time Stops in MVM.

“The three outlets were closed immediately and will remain so until further notice,” read the statement posted on MVM’s Facebook page.

At this juncture, HLIB still maintains a ‘Neutral’ rating of Malaysian REITs as they believe some selective REITs remain defensive.

They include industrial REIT (Axis REIT) and office REIT (MRCB-Quill REIT [MQREIT]).

Nazira said Axis REIT and MQREIT are relatively shielded from Covid-19 impact due to its broad exposure to industrial/office space (with high occupancy in their properties) and minuscule exposure to retail space, unlike other mall-based REITs.

Hence, she reckons that Axis REIT and MQREIT will continue to register resilient earnings in the second half supported by their rental income contribution from their tenants.

“We believe these two REITs will provide a safe haven for investors for now. Moreover, at the current level, the average yield for our REIT stocks in coverage is decent at 4.6%.

“Our top pick is MQREIT for its attractive dividend yield of c.8.6% (highest among REITs in our universe) and its relatively more resilient earnings,” she explained.

Rahim & Co International Sdn Bhd real estate agency CEO Siva Shanker said REITs are on track to see earnings recovery as long as governments do not reintroduce the Movement Control Order (MCO).

Siva said most REITs in Malaysia generally are in stable positions and are strong enough to weather the impending storm.

He stressed that REITs by nature are conservative and not very exposed to immediate ups and downs in the market, as they are a little bit sheltered and have done well previously.

“If REITs are entirely exposed to retail, they will see a slight drop in earnings. For office and industrial REITs, their earnings are more stable.

“They just have to learn to tighten their belt and be cleverer with their spending,” he told TMR.

Conceding the possibility of a few individual retailers shutting down as a result of piling costs and lower sales, Siva said it is unfortunate that some may not be able to weather this storm.

“It is a normal cycle in every recession or downturn that some won’t make it, while others do. But new investors will come and fill up the space. That’s the norm. Every recession will see new players coming in with new money,” he said.

Yesterday, TMR reported that more than 51,000 retail stores in the country are expected to shutter within the next four to five months as businesses fail to cope with the changing retail landscape amid the Covid-19 pandemic.

Retail Group Malaysia MD Tan Hai Hsin said the number represents 15% of the total industry supply, adding that the industry may see a rapid number of business closures as the loan moratorium offered by the government ended last month.