Retail REITs

Retail REITs: Rentals continue to fall on potential supply overhang
According to DTZ, average first-storey retail rentals fell 1.2% q/q in 4Q15 to $30.50 psf to record a third consecutive decline since 2Q15.

For the whole of 2015, average first-storey rents fell at a faster pace of 5.9% versus 2014’s 0.3% decline.

The decline was attributed to poorer consumer sentiment amid uncertain global economic conditions. This, coupled with the completion of retail developments such as OUE Downtown Gallery, The Heart at Marina One and Tanjong Pagar Centre in 2016, could exert further downward pressure on rental values.

However, the property consultant contends that rental weakness is likely to be temporary until residential components of some of the mixed-used developments receive their TOPs. These include the 1,024 residential units at Marine One, and 181 residential units at Tanjong Pagar Centre.

While rents have fallen, DTZ notes that occupancy rates remained healthy with overall retail occupancy inching up 0.3 ppt to 92.1%.

Despite this, Maybank-KE holds a negative view on retail REITs given that retail supply is projected to reach 2.3x annual historical demand this year and 1.9x in 2017-2018.

While occupancy levels have not been affected thus far, the house sees vacancies creeping up and rental reversions slowing to low single digits over the next three years.

The house maintains its Sell calls on CapitaLand Malls Trust (TP: $1.66), Mapletree Commercial Trust (TP: $1.11), and Frasers Centrepoint Trust ($1.63).

Its sole Hold rating is on Starhill Global REIT (TP: $0.76) for its better DPU growth visibility from first year contribution of its Adelaide property as well as its Wisma Atria property outperforming. The REIT is currently trading at 7.3% forward yield against the house target yield of 7.5%.