SUNWAY Real Estate Investment Trust (Sunway REIT) has invested RM1 billion in Sunway Putra Place, including over RM400 million on the refurbishment of the development, which includes the shopping mall and hotel and office block, located opposite The Putra World Trade Centre (PWTC).
With the investment of such a big sum, which will see an increase in net lettable area, shareholders of Sunway REIT (fundamental: 1.0; valuation: 0.5) have high hopes that the property can provide a fresh source of steady rental income.
The REIT targets to reap a return on investment (ROI) of 7.5% to 8.5% from Sunway Putra Place once it has stabilised operations within two to three years of the completion of the refurbishment.
The targeted ROI will translate into RM75 million to RM80 million of net income a year — which is more than half of Sunway REIT’s net profit of RM126.7 million for the financial year ended June 30, 2014 (FY2014) on revenue of RM227.8 million.
Sunway Putra Mall, which is expected to be relaunched in the second quarter, is of particular interest. Many are keeping a close watch on whether the Sunway group will be able to replicate the success of its flagship Sunway Pyramid shopping mall in the city centre.
Competition for tenants and shoppers could be a concern as Quill City Mall, which is barely 2km away, will be opening soon. Furthermore, there are already quite a few shopping malls within a 10km radius. Sunway Pyramid is in a better catchment area as there aren’t any big malls near it.
Nonetheless, Exastrata Solutions Sdn Bhd chief real estate consultant Adzman Shah Mohd Ariffin says Sunway Putra Mall is a good investment. “It is difficult to develop new malls in the city centre nowadays due to high land costs. Acquisition opportunities are also very hard to come by, especially for integrated developments with mall, office and hotel components,” he tells The Edge in an email. “They (Sunway REIT) have also managed to add approximately 100,000 sq ft to the existing 500,000 sq ft and this will help to recoup the investment cost faster.”
Adzman estimates that a permanent retail shoplot in a decent mall in the Putra Place area can fetch between RM12 and RM50 psf a month, depending on its size, location and type of trade.
“Sunway should not have any problems filling up the mall space based on their current strength as it has Sunway Pyramid and Sunway Carnival Mall [in Seberang Jaya, Penang] with good links to retailers.
“The spillover of visitors from PWTC and proximity to the light rail transit (LRT) station will enhance the attractiveness of the mall, office and hotel,” he says.
The key concern is finding corporate tenants for its office tower, which is targeted to open by the end of this year, considering the increasing supply of office space in the central business district. “We think the general KL office space market is still challenging, and so refilling the occupancy at the Sunway Putra Tower might not be too easy after Suruhanjaya Koperasi [Malaysia] moves out completely,” says AllianceDBS research analyst Marvin Khor, referring to the tower’s operation of convention and exhibition halls. As at June 2014, Suruhanjaya Koperasi was the top tenant, contributing 57.8% of the tower’s gross rental income.
“On the hotel side, management is targeting an average occupancy of around 73% after stabilisation, which is decent for hospitality assets. It will probably attract mostly corporate guests and provide MICE [meetings, incentives, conferences and exhibitions] functions,” Khor adds.
Exastrata Solutions’ Adzman estimates that the rental rate for Grade A office space in the Putra Place area fetches RM6 to RM7 psf a month. “A four to five-star hotel can command a rack rate of RM300 or more per night in this area,” he adds.
Sunway Putra Tower will have a net lettable area of 317,051 sq ft while Sunway Putra Hotel will have a gross floor area of 833,844 sq ft and a total of 618 rooms.
Khor believes Sunway REIT should be able to achieve stabilised net property income yields of above 7% — based on stabilised/mature occupancy levels — which is “pretty decent”. “I think the proximity [of Quill City Mall] should not be too much of a concern as the mall [Sunway Putra Mall] has been able to secure a healthy tenancy of 70% as at end-January,” he tells The Edge.
An analyst from MIDF Research estimates that Sunway REIT could see a 12% growth in net dividend distribution to 8.81 sen in the financial year ended June 30, 2016 (FY2016) from 7.87 sen in FY2015, with the contribution of additional rental income from Sunway Putra Mall.
“We believe that competition from Quill City Mall should be neutralised by the LRT station being nearby,” he says, adding that an estimated 75% of Sunway Putra Mall should have been let out by now.
Sunway REIT is UOB KayHian Research’s top pick in the REIT sector, along with CapitaMalls Malaysia Trust. Property assets held by Sunway REIT include Sunway Pyramid and Sunway Carnival Mall, Sunway Tower, Sunway Medical Centre, Sunway Resort Hotel & Spa and Sunway Pyramid Tower Hotel.
“We believe that the upcoming Sunway Putra Mall that is poised to open in 2Q2015 will boost earnings by 12% in its [first] full-year of operations, which will further boost its FY2016 dividend yield to 6.7%,” says the research house.
According to analyst consensus from Bloomberg, Sunway REIT is expected to see 5.5% distribution yield in FY2015. This compares to IGB REIT’s 5.6%, Pavilion REIT’s 5.34% and CapitaMalls Malaysia Trust’s 6.05%.
Sunway REIT closed at RM1.56 last Thursday, giving it a market capitalisation of RM4.58 billion.
Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.
This article first appeared in The Edge Malaysia Weekly, on March 23 - 29, 2015.