More pain ahead for mall landlords on back of massive supply glut

Can retail REITs stay resilient?

Mall landlords will face intensifying earnings pressures due to a massive supply of new retail space floods the market, according to a report by UOB Kay Hian.

UOB Kay Hian expects retail rental growth to hover at 0-3% in 2016, as the retail environment continues to be dragged down by increased supply, rising costs and threat from alternative retail channels.

“Average rents are expected to face downward pressures with recovery in sight in 2H16. Suburban malls, in particular, are likely to remain relatively resilient, courtesy of their respective catchment areas and higher proportion of necessity shopping vis a vis Orchard Road malls,” said UOB Kay Hian.

Despite this, retail REITs are expected to continue delivering value through active asset allocation, management and enhancement.

“Retail REITs have proven to be relatively resilient to downturns in comparison to the other property segments. Retail REITs deliver discernable value through asset enhancement, site selection and better building maintenance,” the report said.