Asset enhancement works to slam retail REITs’ occupancy in H2

Analysts capped sector growth at 0.7% in FY16.

Singapore retail REITs are going to feel the blow of asset enhancement initiatives (AEIs) in H2, as ongoing renovation works chip at occupancy.

According to a report by CIMB, Singapore retail  REITs' distribution per unit (DPU) are expected to improve a meager 0.7% YoY in FY16 to FY17.

The main drag for the sector's projected DPU growth stems largely from CapitaLand Mall Trust, as its Funan IT Digital Mall will remain shuttered for three years starting June this year.

"The property will be doubled in size to 611k sq ft of NLA into an integrated lifestyle mall/office/serviced residence property when completed in 4Q19. The redevelopment exercise will cost $560m and will be internally funded," CIMB noted.

Meanwhile, Frasers Centrepoint Trust is likely to see occupancy shrink to 76% over the next six months on back of renovation works ahead of the property's integration with new Northpoint City which continue to be under development.

It’s a disappointing turn, considering that the local retail property sector enjoyed a resilient Q2 despite headwinds.

"Retail sales (excluding motor vehicles) contracted by 3% yoy for Apr and 3.3% YoY for May. The fashion trade sector was beaten down further, with British apparel brand New Look and French menswear Celio announcing their exits from the island-state," stated CIMB.

In Q2, retail landlords resorted to short-term leasing to pop-up stores to prop up occupancies. The Orchard Road shopping belt and the secondary shopping area floundered in contrast to resilient suburban malls that integrated with major transport nodes.

The sector pulled through, however, as REITs continued to chrun out positive rental reversions for their lease expiries. During the quarter, retail REITs grew 0.4% YoY.