Mall operators may raise rents by 6.5% or more this year: DBS

Despite 2.6msf of retail space over 2009/2010 falling to 0.9msf p.a over the next 2 years, landlords will still get a raise.

DBS said, it will be another year of strong performance for the retail property sector as easing supply and rising consumer confidence, coupled with the recovery in economic activity boost domestic demand. The two integrated resorts should continue to support tourist arrivals resulting in a positive knock-on impact on the retail sector, with increasing shopper footfalls. Although new supply is skewed towards the suburban areas, we remain positive in this segment and expect rents to continue rising due to strong GDP growth and low unemployment rate.

DBS noted that over 90% of CMT and FCT leases have step up and gross turnover clauses, which will support rental growth. GTO contributes about 3-5% of their revenue and landlords should be able to enjoy a straight pass through to their bottom-line. Earnings upside should also come from positive organic rental growth. Last year, CMT and FCT saw positive rental reversions of between 6.5% and 7.2% compared to the preceding rents in FY10 and we believe they should be able to achieve similar performance this year underpinned by the favourable environment.

DBS continues to like retail reits as the sector is largely less vulnerable to policy risks and external shocks compared to the other property sectors. They favour the suburban retail sector backed by the more resilient nature of non-discretionary consumption, a growing population and rising incomes.