Retail REITs see mixed outlook in 2023

Notably, the stronger distributable income growth of 20 per cent year on year (y-o-y) in Pavilion REIT was primarily attributed to recognition of a seven-month contribution from the newly acquired Pavillion Bukit Jalil, after its injection on June 1, 2023.

Analysts

KUCHING: Results for real estate investment trusts (REITs) for 2023 came in mixed based on AmInvestment Bank Bhd’s (AmInvestment Bank) review as out of six companies under its coverage, two were in line, two beat expectations and the remaining two fell short.

Specifically, IGB REIT, Pavilion REIT and YTL REIT posted stronger yearly 2023 results while Sunway REIT, Hektar and UOA REIT registered weaker results.

IGB REIT and Pavilion REIT registered stronger earnings in 2023 as a result of favourable rental reversions and improvement in occupancy rates in their malls.

“Notably, the stronger distributable income growth of 20 per cent year on year (y-o-y) in Pavilion REIT was primarily attributed to recognition of a seven-month contribution from the newly acquired Pavillion Bukit Jalil, after its injection on June 1, 2023,” the analysts said.

IT saw that less established and suburban malls did not fare as well compared to prime counterparts.

“Y-o-y, the 21 per cent drop in Hektar’s distributable income was mainly attributed to the increase in finance cost and negative rental reversion in FY22.”

Meanwhile, the industry is seeing stronger rental revenue for retail malls in prime locations, partially offset by higher electricity tariff and increased finance cost.

In 2023, the net profit margin of retail REITs was impacted by the increase in electricity tariff surcharge that took effect on January 1, 2023.

“Nevertheless, this was mitigated by the stronger rental revenue in 2023 as a result of substantial improvement in tenant sales and footfalls in retail malls.

“Looking ahead, we expect the retail sector to maintain its revenue growth momentum in 2024 on the back of higher private consumption growth of 5.7 per cent in 2024 versus 5.6 per cent in 2023.

“Hence, we maintain our assumptions of rental reversions of five to six per cent in 2024, mirroring the figures observed in 2022, particularly for malls situated in prime locations such as Mid Valley Megamall, Pavilion Kuala Lumpur and Sunway Pyramid.

“However, rental reversions for less established malls are likely to remain flattish or slightly positive. For these smaller malls,

increasing occupancy rates through more affordable rents will be imperative.”