KUALA LUMPUR: Robust growth in distribution per unit (DPU) of retail real estate investment trusts (REITs) may not be sustainable this year, as slower consumer spending and the impending implementation of the goods and services tax (GST) are likely to limit DPU growth.

According to data compiled by The Edge Financial Daily, the top three best performing REITs in terms of DPU in 2014 were KLCC Stapled Securities, YTL Hospitality REIT and IGB REIT. Their DPU growth year-on-year (y-o-y) was 16.24%, 14.63% and 10.65% respectively.

KLCC Stapled Securities (fundamental: 1.6; valuation: 2.1) announced a DPU of 33.64 sen for its financial year ended December 2014 (FY14) compared with 28.94 sen the previous year.

YTL Hospitality REIT (fundamental: 0.35; valuation: 3) declared a DPU of 8.46 sen for its FY14 ended June 2014 compared with 7.38 sen in FY13. The REIT is one of the property trusts of YTL Group and owns prime hotels and hospitality-related properties in Malaysia, Australia and Japan.

Apart from IGB REIT (fundamental: 2.8; valuation: 0.5), which saw its DPU grow 8.15% to 7.79 sen for its FY14 ended December, another retail REIT, Pavilion REIT (fundamental: 2.8; valuation: 0), also posted a strong DPU growth of 8.15% for its FY14 ended December, while CapitalMalls Malaysia Trust (CMMT) (fundamental: 1.8; valuation: 2) recorded a marginal growth of DPU of 0.68% in FY14.

Meanwhile, Tower REIT (fundamental: 1.6; valuation: 3.0), Atrium REIT (fundamental: 1.9; valuation: 3) and Sunway REIT (SunREIT) (fundamental: 1; valuation: 0.5) posted negative growth in their DPU as the REITs declared lower distributions y-o-y.

Analysts said strong DPU growth by retail REIT players is unlikely to be repeated this year as the retail industry is expected to encounter headwinds going forward.

In the revised Budget 2015, the government lowered the forecast gross domestic product growth to 4.5% to 5.5%, from 5% to 6% previously.

“Some retail REITs will record a negative growth in DPU due to the impact of the GST,” said an analyst who covers the REIT sector.   

“All these years there wasn’t any issue that [could] badly impact private consumption. The retail industry has always been resilient despite slower economic growth or higher inflation,” she told The Edge Financial Daily. This time, however, the GST could adversely impact retail sales.

“The rental income of retail malls very much depends on sales. In many cases, rental is charged based on a percentage of the sales generated by tenants.

“At least two quarters are needed for consumers to adapt and for sales to normalise. This will affect the income of the shopping malls, hence, retail REITs are expected to declare lower distributions this year,” she said.

Moreover, the major tenancy renewals for Pavilion REIT and IGB REIT happened in 2013 and 2014. Hence, there is no catalyst for a higher DPU growth for retail REITs as rental reversion is done every three years, the analyst said.

While retail REITs have always been the investment darling, the analyst said this year will be an exception — the office and industrial segments could see a more stable growth in DPU.

She reckoned that shopping malls such as Suria KLCC and Pavilion Mall will be less affected by slower sales, due to their prime location, while also being a major tourist attraction drawing in foreign footfall.

“The decline in DPU for IGB REIT, with most of the shoppers at Mid Valley Megamall being locals, will be more significant compared with Suria KLCC and Pavilion KL, which are hotspots for tourists.   

“Industrial REITs such as Axis REIT (fundamental: 0.9; valuation: 0.5) and Quill Capita Trust (fundamental: 0.55; valuation: 3) may have some growth in DPU; while mixed portfolio SunREIT which has more exposure to the office segment will also be more resilient compared with retail REITs,” she said.

In a note dated Dec 31, 2014, Kenanga Research analyst Sarah Lim also said GST is less detrimental to office and industrial assets as they have longer lease periods and comparatively lower step-up rates.

Axis REIT recorded a DPU growth of 6.76% in FY14, while Quill Capita Trust’s DPU was flattish.

Lim also said premium malls such as Suria KLCC, Pavilion Shopping Mall and The Gardens (IGB REIT) will be able to weather the GST better, as their shoppers tend to enjoy higher purchasing power.

“We believe non-premium malls like Sungei Wang, Mid Valley and Sunway Pyramid may see slight declines in sales per shopper or potentially even a dip in shopper traffic volume during the ‘adjustment period’,” Lim said.

SunREIT is her top pick due to strong DPU growth prospects.

This article first appeared in The Edge Financial Daily, on February 9, 2015.