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Swelling supply weighs on Malaysian retail property trusts' earnings

KUALA LUMPUR (NewsRise) - Earnings of Malaysian retail property trusts are likely to stay under pressure this year as a supply rush of mall spaces and weak consumer sentiment limit prospects of growth in rental income.

Rental reversion - a key measure that refers to revision in rental rates when tenants renew their leases - is expected to remain 'muted' and under pressure this year, CapitaLand Malaysia Mall Trust's Chief Executive Low Peck Chen said on Thursday.

"Competition is expected to intensify" and it may take "longer for us to fill up vacant units" in the properties within Kuala Lumpur and its surrounding area, she added.

For Pavilion Real Estate Investment Trusts, rental reversion for Pavilion Mall -- the trusts' flagship mall in downtown Kuala Lumpur that targets premium shoppers - is expected to be "flattish" this year amid challenging market condition, said its head of retail Joyce Yap.

Analysts are predicting rental rates this year will barely rise as swelling future supplies weigh on occupancy rates in Kuala Lumpur and its surrounding area, a region known as Klang Valley that already boasts some 53 million square feet of net lettable area across 146 shopping centers.

Rental reversion in Klang Valley has been under pressure over the past one-and-a-half year, growing at single digit, said Kenanga Investment Bank's analyst Marie Vaz. This year, the average rental reversion rate for retail-centric REITs would likely stay between 5% and 7%, she added.

Developers are adding some 16.58 million square-feet of retail space, which will be available by 2019, according to real estate services firm CBRE WTW, putting further pressure on rentals and tenant renewals in the months ahead.

In the longer-term, retail malls will be grappling with rising online commerce that may lower footfalls, said Low, who manages five malls under CapitaLand Malaysia that welcomed nearly 60 million shoppers last year.

"Some shopping malls are switching their demography to include more food-oriented tenants to cushion the risk from e-commerce," said Vaz.

Shares of CapitaLand Malaysia, which has gained over 7.0% so far this year, fell 1.8% to 1.63 ringgit. Pavilion REIT rose 0.6% to 1.74 ringgit, helping to trim its year-to-date loss to 8.4%. The benchmark FTSE Bursa Malaysia KLCI has gained 6.5% since the end of 2016 and ended Thursday down 0.1%

-- Jason Ng and Gho Chee Yuan

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