In this post, I will be analysing IGB REIT. Please note that this post will not cover lease expiry as the information is scant at this juncture. However, CIMB research has forecasted the lease expiry is in the range of 30-40% of total Net Lettable Area for FY 2017.
IGB REIT is considered as a Retail business due to the fact that the Retail segment is the largest contributing segment in term of revenue at about 36.1% in FY 2016. This REIT is anchored by two prime assets namely Midvalley Megamall and The Gardens Mall in Klang Valley, Kuala Lumpur.
1) These two prime properties are strategically located
The two prime properties are located near Bangsar, Damansara Heights and Seputeh. It is also easy accessible in term of Federal Highway and public transport KTM. Midvalley Megamall is Malaysia’s largest retail mall and act as a one of primary destination for many locals and out-of-state residents. With the NLA of about 1.82 million square feet, 6,092 parking bays and located in the city centre area puts Midvalley Megamall in a very strategic location.
The Garden Malls is a high-end retail mall houses international luxury brands from all over the world designed to target upper middle to upper income level residents from affluent areas in Mont Kiara, Sri Hartamas, Bangsar, Damansara Heights and many more. The NLA of this mall is about 866,411 sqft with 4,128 parking bays.
Besides these two malls, there is an upcoming Midvalley Southkey Megamall (MSM) in Iskandar Johor which commenced construction in 2015 and expected to complete end of FY 2018. This will be one of the largest shopping centre in Southeast region of Peninsular Malaysia with about estimated NLA of 1.5 million sqft, about 36% of NLA injected into the group. Located in the centre of Johor Bahru with well-connected highways, 6-7 minutes drives from Johor Bahru’s Custom which makes it attractive to Singaporeans, no doubt the MSM is located at a very strategic location in Johor.
Source: SouthKey Website
2) Tenant’s Quality in these two malls is diverse
It caters for all class of consumers consist of high, middle and low income consumers. Based on CIMB research report, the Group’s top four trade sector consists of Departmental stores (40% of the group’s NLA), fashion, entertainment and F&B. If you’ve ever been to Midvalley and The Gardens cinemas, you will realise that they have the largest Golden Screen Cinemas (GSC) and GSC Signatures which is a higher end option. Though IGB REIT did not provide much information on their tenant’s contributing percentage and all the list of tenants, no doubt they have very diverse tenants (Aeon, GSC, Parkson, Uniqlo, Cold Storage and many more) if you have visited these malls. Thus the quality of tenants in these two malls are in good grades.
3) The occupancy rates for Midvalley and The Gardens hover between 97% to 99%.
Its sustainable and stable occupancy rates show that the malls will have a positive future rental with long list of potential tenants. Now let’s consider Midvalley, The Gardens and Pavillion mall’s revenue per sqft of NLA. As shown in the table below, the revenue per sqft of NLA of Midvalley and The Gardens mall has a CAGR of 4.46% from 2014 to 2016. However for Pavillion Mall, it has CAGR of 17.96%. This shows that the rental rate charged by IGB REIT in Retail segment is relatively stagnant throughout these three years. This could be part of the tenant’s retention strategy.
Given the fact that IGB REIT has a positive rental reversions due to strong demand for spaces, sustainable tenant sales growth and high traffic of inflow, I concur that IGB REIT is a good quality REIT based on location, tenant’s quality and occupancy rates.
However, investor should always be wary with the rising online shopping culture and slowdown in consumer spending. This will put pressure on retail sales earning to the current tenants in Midvalley and The Gardens mall. In turn, this will affect the sales turnover of IGB REIT in a longer term.
Furthermore, completion of several retail malls located in Kuala Lumpur will also continue to put distort their occupancy rates. Retail malls such as KL Gateway, KL Eco City and Bangsar Trade Centre located around 5-6 km will impact Midvalley and The Garden Mall. Hence, investor must be cognisant that the surge in retail mall supply may affect the rental rates on IGB REIT retail segment.
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