Tough journey ahead for retail REITs
Although we have seen that third quarter (3Q) retail segment has recovered well, recent spike in cases may throw in the spanner. HLIB Research
KUCHING: Hong Leong Investment Bank Bhd (HLIB Research) believe the path to normalcy may take a while for retail real estate investment trusts (REITs) and this positive vaccine sentiment may not essentially turn into consumer confidence and retail spending in 2021.
“Although we have seen that third quarter (3Q) retail segment has recovered well, recent spike in cases may throw in the spanner,” it said in its notes yesterday.
“Some REIT managers shared that when the first case hike in end-October happened, footfall to the mall was impacted and lowered the recovery to circa 50 per cent pre-covid level, as compared to recovery of 75 to 85 per cent pre-Covid level in 3Q.
“The spike in cases, together with muted consumer confidence has led us to be more conservative on recovery of retail industry. While we are aware that recent Christmas and New Year celebration has driven a steady pick up in footfall to
the malls, sustainability of this footfall remains uncertain due persistent high daily cases in Malaysia.”
Based on its channel checks, HLIB Research saw that REIT managers have yet to decide whether to extend rental assistance in 4Q. Although the
rise in cases since the end of October has put a downward pressure on shoppers’ traffic, it was cushioned by recent uptick in footfalls driven by festive celebration.
“Hence, we believe the probability of rental assistance being extended into 4Q is low,”
it said. “However, we note that 4Q’s earnings performance will not be as great at 3Q due to reimplementation and extension of CMCO in 4Q.
“If REIT managers were to give rental rebates, we reckon its magnitude will be minimal and will be based on case-to-case basis to struggling tenants only.
“Looking ahead at FY21, we do not expect any rental assistance to be given unless Covid-19 situation worsens significantly to another lockdown. Overall, we expect a gradual recovery in FY21 as we think that shoppers traffic and tenant sales may not be able to revert to pre-Covid level in the absence of international tourists. Flattish to mildly-negative rental reversion is expected for mall.
“We believe prime malls should be able to register flattish rental reversions and able to sustain their occupancy rates due to strategic locations that become attractions among retailers. However, other malls with weaker bargaining power are likely to give out mildly negative rental reversion in order to retain their tenants.”
As for hotels, HLIB Research saw that the lift of interstate and inter-district travel bans by government in late November have helped to revive the domestic tourism industry.
“Based on channel checks, resort-type hotels have been receiving a lot of demand and lead to a surge in domestic tourism as hotels were filled up with year-end holidaymakers.
“However, demand of hotels in the Kuala Lumpur city area was not as strong vs resort type hotels in Langkawi, Pangkor and Cameron. According to HLIB’s internal assumption of vaccines timeline, we believe international border will not be fully opened till end-2021.
“We also believe there could be a restricted opening for business travel, but not for tourism yet. Hence, we reckon full recovery to normalcy is unlikely in 2021 for the hospitality industry, but should be better compared to 2020 driven by pent-up demand in domestic tourism.”