Saturday, September 21, 2013

Falling yield not a worrying trend

Falling yield not a worrying trend


RETAIL properties in the Klang Valley may be recording a falling yield but the numbers were not worrying, according to industry observers. However, the downtrend seems likely to stay.

C H Williams Talhar & Wong Sdn Bhd managing director Foo Gee Jen notes that Malaysian real estate investment trusts (REITs) have reported a yield drop from an average of 6.8% in 2011 to 6.2% last year but “we do not consider the yields as low”.

He says in an e-mail reply that based on retail performance statistics reported by retail Malaysian REITs in 2012, yields averaged 6.2% and ranged from 6% to 7.5%.

In comparison, the average retail yield reported was 6.8% in 2011, reflecting a 0.6% drop.

“For retail yields, there will appear to be a declining trend as long as property owners continuously revalue their properties at the current rate.”

He explains that by and large, the slower increase in retail rent has not correspond with the rapid increment in capital value of retail properties. This results in yield compression and would likely be the trend going forward, Foo observed.

“However, retail rents have increased from 5% to 10% in the past couple of years and consequently the lower reported yields reflect the substantial revaluations (of the properties) reported by Malaysian REITs,” he says.

At the moment, the average rent for Tier-1 or super regional malls range from RM11 to RM21 per sq ft per month. Other malls range from RM6.50 to RM7.50 per sq ft per month for Tier-2.

Foo notes that yields are generally similar as revaluations are tied to rental income, perceived risks and future prospects of the retail mall.

Henry Butcher Retail managing director Tan Hai Hsin says the falling retail yield “only reflects the market condition and current competition”.

He says established and popular shopping centres should be able to generate a yield of 7% to 9% while shopping centres located in secondary locations in Malaysia should have a yield of 5% to 7%.

“However, some established shopping centres in small towns of Malaysia are able to generate a good yield of more than 7% due to lack of competition.”

Shopping centres with relatively low occupancy rates will have a yield below 5%, Tan tells StarBizWeek at the launch of mobile app ChopInk by Werebits Sdn Bhd recently.

Is there an oversupply of retail space in the Klang Valley, thus creating too much competition?

Tan says Klang Valley has always been perceived to be oversupplied with malls but developers continue to build more throughout the area.

He draws attention to the disparity between success stories and failures instead.

“Popular shopping centres throughout the country continue to attract shoppers and quality tenants despite intense retail competition and weak economy.

“At the same time, shopping centres that have been suffering from low shopping traffic will continue to face challenges in attracting crowds.”

To the issue of an over-crowded retail property segment, Foo says the retail property sector in the Klang Valley is currently considered in line with market demand.

“Retail malls generally cater to a specific catchment market while super regional malls target tourist arrivals. As long as retail malls are region-specific or continue tapping the growing tourist market, over-crowding of the retail property segment will not arise.”

In the retail space, that there should be 12 developments coming on stream in the next four years, including two refurbishments and one redevelopment, Foo says.

“This translates to an average three malls of about 500,000 sq ft contributing to the total supply each year, (which) we do not foresee would be an oversupply situation.”

On whether retail yield is better than office yields in the current market, Foo says the two property types should not be direct comparisons as they generally have different risks and cost profiles.

However, he says, some office buildings have reported yields higher than retail centres. “Coupled with their greater tenant stability, many would view office yields as preferable to retail yields which are more tenant volatile and demand greater management and marketing expertise.”

Publish date: 21/09/13

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