Pavilion REIT to see lukewarm rental income
KUCHING: With poor retail spending outlook and an incoming supply of new retail space in Kuala Lumpur, AllianceDBS Research Sdn Bhd (AllianceDBS Research) remains lukewarm for rental income for Pavilion Real Estate Investment Trust (Pavilion REIT).
Rental reversions at Pavilion REIT’s crown jewel, Pavilion KL Mall, clocked in at only nine per cent in 2014 compared to 15 per cent the year before, it said in a note yesterday.
“It does not look good this year either, due to poor retail spending outlook with GST implementation, and an incoming supply of new retail space in Kuala Lumpur,” AllianceDBS Research added.
“Both are expected to give tenants better bargaining power, suggesting reversion rates are likely to be mild. Nonetheless, we expect Pavilion KL mall’s occupancy to remain high at above 97 per cent given its prime location.”
Pavilion REIT’s rights of first refusal remain the key re-rating catalysts. First, construction of the USJ da:men mall with 450,000 square feet net lettable area (NLA) is expected to be completed at end2015.
M<eanwhile, the Pavilion Extension, with a 250,000 square feet of NLA, is expected to be completed by end-2016 and will naturally benefit from its proximity and connectivity to Pavilion KL via an underground walkway.
“Finally, it also has the rights of first refusal to Fahrenheit88 mall, which also sits along the Bukit Bintang shopping belt, opposite Pavilion KL. Pavilion REIT’s low gearing at 15.2 per cent suggest there is sufficient debt headroom.”
AllianceDBS Research imputed lower reversion rates of eight, nine and nine per cent for FY15F, FY16F and FY17F respectively in light of softer retail space outlook.
“While Pavilion REIT’s long term growth prospects are anchored by potential injection of assets with ROFR, investors are unlikely to price these in until there is further clarity on the injection timeline. That said, forward yield of 5.4 per cent remains decent,” it concluded, maintaining a target price of RM1.55 per share for the REIT.