This article first appeared in The Edge Malaysia Weekly on November 28, 2022 - December 4, 2022

Talk of Pavilion Real Estate Investment Trust (REIT) buying Pavilion Bukit Jalil mall from Malton Bhd first surfaced in December 2021. Last Tuesday, the REIT finally signed an agreement with Malton’s subsidiary Regal Path Sdn Bhd for the proposed acquisition with a transaction value of RM2.2 billion against the cost of investment of RM1.93 billion.

With the recovery in the economy and retail sales, it could be a good time to undertake such an acquisition. Analysts see this as an earnings-accretive deal, in line with the REIT’s strategy to expand its retail portfolio.

The encouraging retail performance was evident in its latest quarterly results, which saw net property income (NPI) jump 90% to RM90.22 million in the third quarter ended Sept 30, 2022, from RM47.47 million in the same quarter a year ago. On a quarterly basis, its NPI was 8.6% higher than the RM83.11 million in the April-June period.

With a net lettable area of 1.82 million sq ft, Pavilion Bukit Jalil is smaller than IOI City Mall (2.5 million sq ft) and 1 Utama Shopping Centre (2.19 million sq ft).

Big retail malls that have been around for more than two decades in the Klang Valley generally achieve occupancy rates of over 90%. Pavilion Bukit Jalil, which opened its doors about a year ago, has an occupancy rate of 78.23%.

Shopping malls sprang back to life with the reopening of the economy and the emergence of post-pandemic “revenge shopping”.

Nevertheless, the threat of e-commerce to bricks-and-mortar retail shops is undeniable, with many retailers choosing to sell the bulk of their products online. As such, mall operators need to tweak their business models. 

In addition, higher inflationary pressures may cause shoppers to tighten their belts, which will not augur well for retail sales.

Against this backdrop, shopping mall operators might not have the option of raising rents. It is understood that some are still offering discounts to their tenants.

While the economy remains on a growth path, competition within the retail space, incoming retail space supply and a potential reversal in consumer behaviour may pose a risk to the industry.

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