Niche commercial property in good locations seen continuing to thrive

PETALING JAYA: Occupancy rates and rental reversions for strategically located niche offices will continue to thrive despite the sluggish investor appetite for Malaysian real estate investment trusts (REITs) currently.

According to UOB Kay Hian, offices in prime locations (typically grade A and with green building specifications) as well as niche (purpose-built) offices remain shielded from low occupancy and negative rental reversions.

“Offices held by KLCC Stapled Group, such as Menara Maxis, ExxonMobil, Petronas Twin Towers, Menara 3 Petronas and Menara Dayabumi, are all fully occupied with longterm leases and annual rental reversions in the mid single digits.

“Similarly, for MRCB-Quill REIT which has most of its offices based on a purpose built-tosuit basis, its portfolio occupancy rate remained high at 97.3%,” the research house said in a report yesterday.

Additionally, UOB Kay Hian said some office REITs under its coverage reportedly experienced very low occupancy rates in the second quarter of 2017, such as Sunway Tower and Sunway Putra Tower with occupancy rates of 20.7% and 36.6% respectively.

“Although the occupancy rates of both office REITs have gradually improved, management stressed that the current operating environment is challenging, no thanks to the influx of office space and a generally cloudy economic outlook.”

For the commercial segment, UOB Kay Hian said property supply continues to outstrip demand.

“There are growing concerns on the continuous supply of commercial properties (particularly malls and offices), especially in the Klang Valley, which may lead to lower occupancy rates and ultimately result in negative rental reversion.

“The market is expecting about 10.1 million and 9.9 million sq ft of retail and office net-lettable area (NLA) to be ready by end 2017 respectively. This represents an additional 8.5% and 10.6% of total NLA for malls and offices respectively.”

The research house is maintaining a market weight call on the local REITs segment, given the lack of compelling catalysts in the near term.

“We still believe that the oversupply of office and retail space is far from over.

“However, we think the niche office buildings and prime retail malls will remain resilient in the long term.”

For exposure to retail REITs, UOBKayHian said it likes IGB REIT and has set a target price of RM1.86 for the company.

“We believe it has the lowest earnings risk (due to solid rental reversion and highest retail sales) and an implied dividend yield of 5.2%.

IGB REIT also posted resilient earnings growth in the first half of 2017, solely on organic growth at MidValley MegaMall and The Gardens Mall.

The research house pointed out that IGB REIT was also able to record a rental reversion of 5% in the second quarter of 2017 with tenant sales reported in the high single digits.