SUNWAY REIT Management Sdn
Bhd CEO Datuk Jeffrey Ng Tiong Lip says the company will remain
focused on retail with at least 60% retail exposure as measured by asset size,
revenue or net property income (NPI) over the long term. The company manages
Sunway REIT.
Ng says they are mindful of the market cycle and impending oversupply of retail space.
“We have noted many sellers of assets entering the market,” he says in an email.
It bought the Yaohan Mall, later renamed Sunway Putra Mall, through a public auction in 2011. It has two shopping malls in the pipeline, namely Sunway Giza and Sunway VeloCity Shopping Mall but this depends on their financial performances and pricing by the vendor.
He shares his views on the retail and REIT industry:
What is your outlook for the retail and REIT industry? Is there any pressure on mall rentals today?
By end-September 2013, distribution yields of large-cap M-REITs have moved closer to 5.5%-6%. While there has not been a drastic change in fundamentals of the large-cap M-REITs, the decompression of distribution yield is a healthy sign and offer value to investors.
In view of the higher yields, it will be difficult to make yield accretive acquisition especially in prime areas. Operation costs are expected to marginally increase over time due to higher fuel costs, potential electricity tariff increase and minimum wage. M-REITs will need to look into strategies to mitigate rising operation costs.
In the retail sector, leading malls are still enjoying strong occupancy of 95% and above. Retail space is expected to increase in the next one to two years. Although consumption is expected to remain buoyant, (there is a) possibility of slower growth in retail spending in view of the recent rise in fuel prices resulting in higher cost of living.
Leading malls should be able to continue to enjoy rental growth… average performing malls may be pressured to maintain their occupancy rates and rental rates.
What is the impact of a rise in interest rates?
Overnight policy rate is expected to remain steady for the rest of 2013… (but) long-term interest rate could trend up. It is a matter of time before short-term rates move in tandem with long-term rates.
With this in mind, Sunway REIT Management Sdn Bhd (the Manager) has converted a large portion of its debt into fixed rate. The fixed rate portion has increased from 20% in FY2012 to 81% in FY2013. The average debt maturity for the fixed portion debt is 3.6 years. By locking in the rates, this portion of the debt is not susceptible to interest rate movement and will not be affected by higher interest cost.
Please give a brief on Sunway Putra Mall.
The refurbishment period is over 22 months. The mall will resume business by first quarter of 2015 after a refurbishment cost of about RM300mil. Post-refurbishment, it will have a net lettable area (NLA) of just below 600,000 sq ft (compared with 500,000 sq ft before).
Who are the competitors of Sunway Putra Mall?
There are numerous shopping malls in Kuala Lumpur. New malls will enjoy the novelty factor in the short term. Being able to sustain the footfall over the longer term horizon (is important). Sunway Putra Mall has a captive market with the Umno headquarters,Putra World Trade Centre in the vicinity and a residential catchment within a 2.5 km radius.
The manager endeavours to maintain or minimise the impact on DPU for the next two years despite the loss of income from Sunway Putra Mall. This is possible if the existing assets continue to perform. It is already a bonus to be able to maintain the DPU for FY2014.
Strategies to minimise impact on DPU for FY2014:
·A major rental reversion commenced last month at Sunway Pyramid Shopping Mall. About 54% (900,000 sq ft) was due for renewal.
·About RM38.4mil were invested to enhance assets. This was completed in the previous financial year and a 15% return on investment is expected. These include the retrofitting of chillers at Sunway Pyramid Shopping Mall, refurbishment of Sunway Hotel Seberang Jaya and a 14,193 sq ft expansion at Menara Sunway.
·Sunway Pyramid Shopping Mall’s NLA will expand by a further 20,362 sq ft and 23,432 sq ft of existing space will be reconfigured. This is expected to be completed by year-end and costing RM40.1mil.
How did we come to this stage where there is an abundance of office, retail and hotel space?
This is due to the overbuilding of investment properties. Landowners wanted to create value by building a portfolio of investment properties for investment purpose. The overbuilding phenomenon eventually led to (the current) oversupply situation. In today’s scenario, there will be a demand for new buildings due to migration of tenants from the older properties.
Ng says they are mindful of the market cycle and impending oversupply of retail space.
“We have noted many sellers of assets entering the market,” he says in an email.
It bought the Yaohan Mall, later renamed Sunway Putra Mall, through a public auction in 2011. It has two shopping malls in the pipeline, namely Sunway Giza and Sunway VeloCity Shopping Mall but this depends on their financial performances and pricing by the vendor.
He shares his views on the retail and REIT industry:
What is your outlook for the retail and REIT industry? Is there any pressure on mall rentals today?
The market capitalisation
of Malaysian REITs (M-REITs) has surged from RM25bil at the beginning of this
year to RM36.3bil (as at Sept 30, 2013) following the listing ofKLCCP Stapled
Group. We expect to see further growth with the emergence of more players in
the next few years.
The trading performance of
M-REITs went through a mild correction in July-August 2013 due to overall
softer market sentiment and a spike in bond yields. Large-cap M-REITs were
trading at highly compressed levels of below 5% prior to the correction.By end-September 2013, distribution yields of large-cap M-REITs have moved closer to 5.5%-6%. While there has not been a drastic change in fundamentals of the large-cap M-REITs, the decompression of distribution yield is a healthy sign and offer value to investors.
In view of the higher yields, it will be difficult to make yield accretive acquisition especially in prime areas. Operation costs are expected to marginally increase over time due to higher fuel costs, potential electricity tariff increase and minimum wage. M-REITs will need to look into strategies to mitigate rising operation costs.
In the retail sector, leading malls are still enjoying strong occupancy of 95% and above. Retail space is expected to increase in the next one to two years. Although consumption is expected to remain buoyant, (there is a) possibility of slower growth in retail spending in view of the recent rise in fuel prices resulting in higher cost of living.
Leading malls should be able to continue to enjoy rental growth… average performing malls may be pressured to maintain their occupancy rates and rental rates.
What is the impact of a rise in interest rates?
Overnight policy rate is expected to remain steady for the rest of 2013… (but) long-term interest rate could trend up. It is a matter of time before short-term rates move in tandem with long-term rates.
With this in mind, Sunway REIT Management Sdn Bhd (the Manager) has converted a large portion of its debt into fixed rate. The fixed rate portion has increased from 20% in FY2012 to 81% in FY2013. The average debt maturity for the fixed portion debt is 3.6 years. By locking in the rates, this portion of the debt is not susceptible to interest rate movement and will not be affected by higher interest cost.
Please give a brief on Sunway Putra Mall.
The refurbishment period is over 22 months. The mall will resume business by first quarter of 2015 after a refurbishment cost of about RM300mil. Post-refurbishment, it will have a net lettable area (NLA) of just below 600,000 sq ft (compared with 500,000 sq ft before).
Who are the competitors of Sunway Putra Mall?
There are numerous shopping malls in Kuala Lumpur. New malls will enjoy the novelty factor in the short term. Being able to sustain the footfall over the longer term horizon (is important). Sunway Putra Mall has a captive market with the Umno headquarters,Putra World Trade Centre in the vicinity and a residential catchment within a 2.5 km radius.
What sort of rental do you
expect for Sunway Putra Mall?
The rental rates will be in
line with the market positioning of the mall (mid-to upper-mid customer
segment) and comparable market rental rates. We expect a stabilised yield for
the entire Sunway Putra Place, inclusive of Sunway Putra Mall, to be between 7%
and 8%.
Will Sunway REIT be able to
maintain its distribution per unit (DPU) in the next two years?The manager endeavours to maintain or minimise the impact on DPU for the next two years despite the loss of income from Sunway Putra Mall. This is possible if the existing assets continue to perform. It is already a bonus to be able to maintain the DPU for FY2014.
Strategies to minimise impact on DPU for FY2014:
·A major rental reversion commenced last month at Sunway Pyramid Shopping Mall. About 54% (900,000 sq ft) was due for renewal.
·About RM38.4mil were invested to enhance assets. This was completed in the previous financial year and a 15% return on investment is expected. These include the retrofitting of chillers at Sunway Pyramid Shopping Mall, refurbishment of Sunway Hotel Seberang Jaya and a 14,193 sq ft expansion at Menara Sunway.
·Sunway Pyramid Shopping Mall’s NLA will expand by a further 20,362 sq ft and 23,432 sq ft of existing space will be reconfigured. This is expected to be completed by year-end and costing RM40.1mil.
How did we come to this stage where there is an abundance of office, retail and hotel space?
This is due to the overbuilding of investment properties. Landowners wanted to create value by building a portfolio of investment properties for investment purpose. The overbuilding phenomenon eventually led to (the current) oversupply situation. In today’s scenario, there will be a demand for new buildings due to migration of tenants from the older properties.
The Star, 5/10/2013
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