For REITs, retail is still on shopping list for 2011

  Written by Chua Sue-Ann    Monday, 10 January 2011 13:23

KUALA LUMPUR: Moving into the New Year, analysts are still bullish on the two retail property-backed real estate investment trusts (REIT) — Sunway REIT and CapitaMalls Malaysia Trust (CMMT), which were listed in July 2010.

Both remain analysts’ top REIT picks driven by expectation that rental income from retail space will continue to grow on the back of strong domestic consumer spending and lifestyle trends. Sunway REIT also stands out for its size — it is Malaysia’s largest REIT — and gives foreign investors a more liquid exposure to the sector.

Sunway REIT was listed on July 8, 2010 with an initial fund size of RM2.4 billion and a portfolio of eight assets in the retail, hospitality and the office space sectors valued at RM3.73 billion, and a total net lettable area of 2.3 million sq ft.

The nine properties in Sunway REIT’s portfolio are Sunway Pyramid Shopping Mall, Sunway Carnival Shopping Mall, Suncity Ipoh Hypermarket, Sunway Resort Hotel and Spa, Pyramid Tower Hotel, Sunway Hotel Seberang Jaya, Menara Sunway and Sunway Tower.

CMMT, the smaller of the two retail REITs listed last year, made its debut on July 16 with three strategic properties in its portfolio valued at RM2.13 billion. The three properties — Gurney Plaza, the Sungei Wang Plaza property and The Mines — have a combined net lettable area of 1.88 million sq ft.

Sunway REIT says retail properties would continue to shine with strong capacity at Sunway Pyramid.

Sunway REIT shares closed at 88.5 sen on its first day of listing — slightly above its retail offer price of 88 sen and two sen below its institutional price of 90 sen.

The REIT’s price has been climbing steadily since mid-September, reaching an all-time high of RM1.05 on Jan 3, 2011. It closed last Friday at RM1.02, which was at a 4.6% premium to its net asset value (NAV) per unit that stood at 97.53 sen as at Sept 30.

Sunway REIT had declared income distribution per unit of 1.51 sen from distributable income for the July-September 2010 period, or the first quarter of its financial year ending June 2011 (1QFY11).  It said it was confident of achieving its profit forecast and full-year income distribution as disclosed in its prospectus.

For 1QFY11, income before taxation amounted to RM310.6 million, comprising realised net income of RM38.4 million and unrealised income of RM272.2 million arising mainly from fair value gain on investment properties. Earnings per unit totalled 11.59 sen for the quarter.

Including 1Q’s unit distribution, shareholders would have made a total gain of 17.6% compared with the initial public offering price.  

According to Sunway REIT’s prospectus, it had forecast distribution of 6.5 sen per unit for FY11. At the current price, the yield works out to 6.4%.

For 2011, Sunway REIT is upbeat that the retail market will perform better driven by strong economic fundamentals, increasing tourist arrivals, urbanisation and a young population base.

“The retail market sentiment improved in 2010 in tandem with the recovery in the domestic and global economies with an estimated 5% to 15% growth depending on retail format, location and size,” Sunway REIT said in the notes accompanying its financial results.

Sunway REIT said its retail properties would continue to shine having recorded increased visitorship and strong occupancy with Sunway Pyramid achieving an occupancy rate of 99%, Sunway Carnival 93% and Suncity Ipoh Hypermarket at 100%.

Some 278 tenancies in Sunway Pyramid, with a net lettable area of approximately 924,000 sq ft or 87% of its total net lettable area, are due for renewal in FY11, Sunway REIT said. Sunway REIT is also expecting a total rent increase of 15.8% for the three-year term.

Additionally, Sunway REIT said its hotel properties are expected to continue performing satisfactorily in line with the tourism industry’s positive outlook while its office space is expected to maintain occupancy levels with a moderate increase.

A softer office market is expected for Kuala Lumpur in the coming year due to increasing supply of office space coming on-stream. But Sunway REIT noted that there were no new supplies of office space in the vicinity of its flagship Bandar Sunway area.

The REIT said Menara Sunway and Sunway Tower have 99% and 95% occupancy rates respectively. Tenancy renewal is due for Menara Sunway but for Sunway Tower, the next renewal is only due in the middle of 2012.

Sunway REIT Management Sdn Bhd CEO Datuk Jeffrey Ng said Sunway REIT’s performance on the local bourse was in line with the company’s expectations given its market dominance of having the largest free float, total asset size and market capitalisation compared with its peers.

Ng said he expects higher trading volume this year, particularly among institutional investors, due to expected better financial performance of Malaysian REITs.

“So long as growth in revenue and net property income moves faster than any increase in interest rates, it would still be attractive to invest in REITs. We are not expecting a significant increase in interest rates,” Ng said in an email interview with The Edge Financial Daily.

Ng is, however, expecting more REIT players to enter the market, which will boost competition for quality real estate assets.

“On the acquisition front, we are actively scouting for yield-accretive acquisition opportunities and we have appetite to acquire large quality asset size of between RM500 million and RM1 billion in 2011,” Ng said.

Meanwhile, CMMT’s share price performance has also closely mirrored Sunway REIT’s.

Upon debut on July 16, CMMT shares had closed unchanged at its revised retail offer price at 98 sen, which was two sen lower than its institutional offer price of RM1.

CMMT’s shares have since moved up, hitting a high of RM1.14 on Jan 3. It closed at RM1.08 last Friday, above its NAV per unit of RM1.03 as at Sept 30.

According to CMMT’s prospectus, it had forecast a distribution per unit of 7.16 sen for the eight-month period from May 1 to Dec 31, based on the previous indicative price of RM1.08 per unit.

CMMT has also forecast a 4.1% growth in distribution to 7.45 sen for its financial year ending December 2011. Based on its last closing price, this corresponds to a yield of 6.9% in FY11, from 6.6% in FY10.

In its 3QFY10 ended Sept 30, CMMT posted net profit of RM81.29 million or 6.02 sen per unit, which comprised net property income of RM30.31 million and RM76 million from a change in fair value of its investment properties.

This was on the back of gross revenue of RM43.39 million, of which gross rental income was RM36.94 million, car park income RM2.91 million and other revenue RM3.54 million.

CMMT has yet to declare dividends. Its policy is to distribute 100% of its distributable income to unit holders for FY10 and FY11.

Subsequently, it aims to distribute at least 90% of its income to unit holders on a semi-annual basis.

Barring any unforeseen circumstances, CMMT said it expected to achieve the projected annualised distribution per unit of 7.16 sen, as stated in its prospectus.

The REIT said it was well-positioned to capitalise on the expected growth in retail consumption in Malaysia as its portfolio comprised quality shopping malls with a large and diverse tenant base.

Of the two REITs, analysts are more positive on Sunway REIT due to its size, high-quality assets and the strong Sunway branding.

However, REITs in general offer limited upside in terms of capital appreciation but high dividend yields and appeal to more defensive investors.  

OSK Research had said in a report in November 2010 that Sunway REIT was likely to offer limited price upside to its unit holders, at least in the medium-term. It added that the REIT was likely to only appeal to certain classes of investors, particularly those with a defensive investment strategy.

However, the research house said the unique mix of properties in Bandar Sunway would continue to enhance the attractiveness of each of Sunway REIT’s properties and generate upside earnings potential through higher rentals and occupancy rates than if each property were on its own.

OSK Research also noted that Sunway REIT had the right of first refusal with respect to any properties to be disposed of by its sponsor, Sunway City Bhd, which has a large and diversified portfolio of properties and many projects in the pipeline.

This year, market observers are expected to keep an eye on how the two REITs intend to grow and add more value.

These can be in the form of new assets, which are value-accretive, injected into the REITs, or opportunities to increase their income base through lease renewals at higher rental rates.

CMMT has also forecast a 4.1% growth in distribution to 7.45 sen for its financial year ending December 2011. Based on its last closing price, this corresponds to a yield of 6.9% in FY11, from 6.6% in FY10.

In its 3QFY10 ended Sept 30, CMMT posted net profit of RM81.29 million or 6.02 sen per unit, which comprised net property income of RM30.31 million and RM76 million from a change in fair value of its investment properties.

This was on the back of gross revenue of RM43.39 million, of which gross rental income was RM36.94 million, car park income RM2.91 million and other revenue RM3.54 million.

CMMT has yet to declare dividends. Its policy is to distribute 100% of its distributable income to unit holders for FY10 and FY11.

Subsequently, it aims to distribute at least 90% of its income to unit holders on a semi-annual basis.

Barring any unforeseen circumstances, CMMT said it expected to achieve the projected annualised distribution per unit of 7.16 sen, as stated in its prospectus.

The REIT said it was well-positioned to capitalise on the expected growth in retail consumption in Malaysia as its portfolio comprised quality shopping malls with a large and diverse tenant base.

Of the two REITs, analysts are more positive on Sunway REIT due to its size, high-quality assets and the strong Sunway branding.

However, REITs in general offer limited upside in terms of capital appreciation but high dividend yields and appeal to more defensive investors.  

OSK Research had said in a report in November 2010 that Sunway REIT was likely to offer limited price upside to its unit holders, at least in the medium-term. It added that the REIT was likely to only appeal to certain classes of investors, particularly those with a defensive investment strategy.

However, the research house said the unique mix of properties in Bandar Sunway would continue to enhance the attractiveness of each of Sunway REIT’s properties and generate upside earnings potential through higher rentals and occupancy rates than if each property were on its own.

OSK Research also noted that Sunway REIT had the right of first refusal to any properties to be disposed of by its sponsor, Sunway City Bhd, which has a large and diversified portfolio of properties and many projects in the pipeline.

This year, market observers are expected to keep an eye on how the two REITs intend to grow and add more value.

These can be in the form of new assets, which are value-accretive, injected into the REITs, or opportunities to increase their income base through lease renewals at higher rental rates.