Retail REITs to remain resilient despite 5% rental decline in 2017

Thanks to its well-positioned malls.

Retail REITs in Singapore will still be on its feet despite impending rental declines awaiting them next year, as OCBC Investment Research said.

The firm expects prime Orchard road rentals to decline by 2%-2.5% in 2016, with a further 3%-5% dip in 2017, while while suburban rents are projected to slip 1.5%-2.0% this year, followed by a decline of 2.0%-3.0% in 2017.

"Notwithstanding the challenges facing the sector, we believe retail REITs have largely remained resilient, which we attribute to their wellpositioned malls with good accessibility in their portfolios. REIT managers have also sought to refresh the tenant mix of their malls and to enhance the shopping experiences of consumers," OCBC said.

To recall, URA retail rental index revealed that there was a 1.5% QoQ decrease in rentals of retail space in 3Q16, and this was the seventh consecutive quarter of sequential decline.

"However, the dip in 3Q16 was lower than the 3.9% fall in rents suffered in 2Q16. In terms of vacancy rates, this came in at 8.4% in 3Q16, and was the highest level since 3Q06. These data points reflect the pressures facing Singapore’s retail scene, amid growing caution amongst retailers and ongoing consolidation of business operations as cost cutting measures," the brokerage firm explains.

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