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Competition expected to rise in retail REIT sector


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PETALING JAYA: Competition is set to intensify in the retail real estate investment trust (REIT) market with the upsurge in the total supply of retail space in the Klang Valley and the risk of an economic slowdown on the horizon.

According to Knight Frank, the cumulative supply of retail space in the Klang Valley is expected to increase from 68.4 million sq ft in 2022 to 71.9 million sq ft in 2023, and 73.7 million in 2024.

Some of the notable new malls expected to open in 2023 are The Exchange TRX (1.3 million sq ft), and 118 Mall (850,000 sq ft).

With the risk of an economic slowdown, this would further compound the downward pressure on rental reversion and occupancy rates.

RHB Research, which recently attended the third annual REIT forum organised by the Malaysian REIT Managers Association or MRMA, said the panelists discussed how these new malls would have a lot of the same tenants which will only increase competition.

“It is important for management to look for new brands and constantly reposition the mall to keep things fresh for customers. Despite the negative outlook, retail REITs have shown to be resilient in surviving the Covid-19 pandemic.

“While growth may be limited, good management by REITs and the strength of key malls should ensure stability,” the research house said.

While negative factors such as high inflation and increasing interest rates are the much-discussed downside risks, they are potentially mitigated with a drawdown of “excess savings” which had grown considerably due to the pandemic, it added.

Other upside risks come from an improving tourism sector and resilient foreign direct investment, as well as a strong approved investment trend in the country for automation, digitalisation and the rollout of the 5G network.

Meanwhile, in the office space segment, CBRE|WTW is expecting the average occupancy rate of purpose-built offices to decline from 80.8% in 2019 to 75.1% in 2023, as new supply comes into the market.

So far in 2022, 2.5 million sq ft of new supply was only met by one million sq ft in demand.

While the structural changes are apparent, the research house said the panelists suggested that a lot of tenants are adopting a “wait-and-see” approach to determine how much space they need.

“As long as tenants adopt a hybrid work model, the demand for office space may not change materially. In fact, some tenants are asking for more space for an open concept office space.

“Moving forward, office REITs would have to cater to the demands of the next generation of workers with features such as on-site childcare or private space at the office, allowing for the benefits of work-from-home at the office,” RHB said.

On the environmental, social and governance (ESG) front, the panelists agreed a proper long-term strategy should be the goal, rather than simply reacting to external pressure, especially as the focus on ESG would move beyond operational to supply chain in the near future.

For REITS, a lot of focus has been on energy and water efficiency, and air quality as they form the key components of a green building certification, but the panelists believe the whole value chain needs to be considered, RHB said.

This includes where building materials are sourced from to evaluate the environment and social impact, type of cleaning materials used every day, waste management and assessing any outsourced staff hiring such as security guards for any risk of forced labour.





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