KUALA LUMPUR: In a clear sign of rapidly rising property values and rentals for Klang Valley malls, the listing of Pavilion REIT earlier this month has set a new valuation benchmark in the industry. The value of its Pavilion KL Mall exceeds by a wide margin those of other malls injected into real estate investment trusts (REIT), and yet offers decent yields.
Based on the REIT’s purchase consideration of RM3.19 billion and net lettable area of 1.335 million sq ft, Pavilion KL is valued at RM2,390 per sq ft (psf) — the highest for a mall injected into a REIT, according to a study by The Edge Financial Daily. The mall’s appraised value is even higher at RM3.415 billion or RM2,558 psf.
This is over four times that of Subang Parade — the first mall to be listed in a REIT — which was injected into Hektar REIT at a mere RM589 psf when it was listed four years ago. Subang Parade, which had 475,022 sq ft of net lettable area, was injected into the REIT at RM280 million, slightly below its then appraised value of RM290 million.
The valuation for Pavilion KL is 85% higher than Sunway Pyramid’s RM1,365 psf, despite the latter being situated in a premium location, with high rental rates and good patronage. Sunway Pyramid forms part of Sunway Real Estate Investment Trust (SunREIT), which was listed in July 2010.
However, neighbouring retail locations within the city centre stand as a more suitable comparison for Pavilion KL. A more immediate peer would be Suria KLCC, which is in the stable of KLCC Property Holdings Bhd (KLCCP), one of a few companies to routinely revalue its properties every year, resulting in more up-to-date valuations.
According to its annual report, Suria KLCC mall has an appraised value of RM3.47 billion and a net lettable area of about one million sq ft. That implies a valuation of RM3,470 psf, a 36% premium to Pavilion KL.
However, it should be noted that KLCCP’s share price of RM2.96 last Friday was well below its book value of RM5.68. This means the market is valuing its properties at only 0.52 times, resulting in a implicit value of RM1,804 psf for Suria KLCC, well below Pavilion KL’s.
By comparison, Pavilion REIT was trading at RM1.05 last Friday, some 12% above its book value of 94 sen upon listing on Dec 6, 2011.
The value of Pavilion KL is also higher than Sungei Wang Plaza’s RM1,607 psf and The Mines Shopping Centre’s RM737 psf. Both Sungei Wang and Mines Shopping Centre are owned by CapitaMalls Malaysia Trust (CMMT), which was listed in the middle of last year.
The value of these retail properties remains high despite the perceived oversupply of shopping centres in the Klang Valley, which CB Richard Ellis Research (CBRE) said accounts for 41.7% of the country’s shopping centre space. Together with Johor and Penang, these areas possess 67.4% of Malaysia’s shopping centres.
According to the Valuation and Property Services Department (JPPH), Kuala Lumpur shopping centres had an occupancy rate of 83.7% and Selangor 86.8% in 2010, both above the estimated national average of 77.5%.
“For prime centres within the Klang Valley, CBRE data shows that the occupancy in Kuala Lumpur is 92.9% while Selangor is 95.4%, leading to an overall prime occupancy rate in the Klang Valley of 94.7%,” said CBRE in a recent report.
For the current year, JPPH estimates 18.1 million sq ft in net lettable retail space is under construction, resulting in a 15.9% increase in retail stock by the year 2013, assuming a three-year construction period, said CBRE.
“With the growing number of malls in the Klang Valley, not all perform favourably and only a select few do well,” said a market observer.
CBRE said the total retail supply in the Klang Valley grew 4.4% to 42.3 million sq ft last year, and another four million sq ft is expected this year, with the bulk to be located in secondary locations such as newly completed townships.
Pavilion REIT’s two properties — Pavilion KL and Pavilion Tower, a 20-floor office building adjoined to the former — are both strategically located at the heart of Jalan Bukit Bintang. The company also holds the rights of first refusal (ROFR) to several properties including a six-storey retail mall to be developed in USJ, Subang Jaya.
“In terms of location, we are looking to further increase our presence in the prime Bukit Bintang area through our current assets as well as two of the ROFRs granted, for Farenheit88 and the proposed extension of Pavilion KL. However, there are limited retail assets in this specific area and it is also our plan to evaluate retail assets in the Klang Valley and other key localities within Malaysia,” CEO Philip Ho told The Edge Financial Daily. Ho noted that the company’s low loan-to-value (LTV) ratio of 20%, well below the 50% cap, provides the financial flexibility to resort to additional debt in order to fund future acquisitions.
Affin Investment Bank noted in an earlier report that a gearing ratio of 30% to 35% would allow the company to raise between RM360 million and RM540 million in debt.
“Going forward though, subject to such acquisition opportunities, we can definitely consider a higher LTV ratio, which is in line with industry norms,” said Ho.
Market observers note that any potential acquisition is unlikely to take place within the immediate term, hence efforts to raise funds via debt or placements for this purpose will only take place from 2014 onwards.
In the meantime, the company will rely on Pavilion KL which forms nearly 96% of its total asset value.
“Pavilion KL is relatively new and having only commenced operations in 2007, we believe there is significant room for improvement on rental yields, net lettable area and other asset enhancement initiatives. The company will be able to provide investors with growth opportunities from its existing portfolio as well through the potential acquisition of additional retail properties,” said Ho.
This article appeared in The Edge Financial Daily, December 19, 2011.
Based on the REIT’s purchase consideration of RM3.19 billion and net lettable area of 1.335 million sq ft, Pavilion KL is valued at RM2,390 per sq ft (psf) — the highest for a mall injected into a REIT, according to a study by The Edge Financial Daily. The mall’s appraised value is even higher at RM3.415 billion or RM2,558 psf.
This is over four times that of Subang Parade — the first mall to be listed in a REIT — which was injected into Hektar REIT at a mere RM589 psf when it was listed four years ago. Subang Parade, which had 475,022 sq ft of net lettable area, was injected into the REIT at RM280 million, slightly below its then appraised value of RM290 million.
The valuation for Pavilion KL is 85% higher than Sunway Pyramid’s RM1,365 psf, despite the latter being situated in a premium location, with high rental rates and good patronage. Sunway Pyramid forms part of Sunway Real Estate Investment Trust (SunREIT), which was listed in July 2010.
However, neighbouring retail locations within the city centre stand as a more suitable comparison for Pavilion KL. A more immediate peer would be Suria KLCC, which is in the stable of KLCC Property Holdings Bhd (KLCCP), one of a few companies to routinely revalue its properties every year, resulting in more up-to-date valuations.
According to its annual report, Suria KLCC mall has an appraised value of RM3.47 billion and a net lettable area of about one million sq ft. That implies a valuation of RM3,470 psf, a 36% premium to Pavilion KL.
However, it should be noted that KLCCP’s share price of RM2.96 last Friday was well below its book value of RM5.68. This means the market is valuing its properties at only 0.52 times, resulting in a implicit value of RM1,804 psf for Suria KLCC, well below Pavilion KL’s.
By comparison, Pavilion REIT was trading at RM1.05 last Friday, some 12% above its book value of 94 sen upon listing on Dec 6, 2011.
The value of Pavilion KL is also higher than Sungei Wang Plaza’s RM1,607 psf and The Mines Shopping Centre’s RM737 psf. Both Sungei Wang and Mines Shopping Centre are owned by CapitaMalls Malaysia Trust (CMMT), which was listed in the middle of last year.
The value of these retail properties remains high despite the perceived oversupply of shopping centres in the Klang Valley, which CB Richard Ellis Research (CBRE) said accounts for 41.7% of the country’s shopping centre space. Together with Johor and Penang, these areas possess 67.4% of Malaysia’s shopping centres.
According to the Valuation and Property Services Department (JPPH), Kuala Lumpur shopping centres had an occupancy rate of 83.7% and Selangor 86.8% in 2010, both above the estimated national average of 77.5%.
“For prime centres within the Klang Valley, CBRE data shows that the occupancy in Kuala Lumpur is 92.9% while Selangor is 95.4%, leading to an overall prime occupancy rate in the Klang Valley of 94.7%,” said CBRE in a recent report.
For the current year, JPPH estimates 18.1 million sq ft in net lettable retail space is under construction, resulting in a 15.9% increase in retail stock by the year 2013, assuming a three-year construction period, said CBRE.
“With the growing number of malls in the Klang Valley, not all perform favourably and only a select few do well,” said a market observer.
CBRE said the total retail supply in the Klang Valley grew 4.4% to 42.3 million sq ft last year, and another four million sq ft is expected this year, with the bulk to be located in secondary locations such as newly completed townships.
Pavilion REIT’s two properties — Pavilion KL and Pavilion Tower, a 20-floor office building adjoined to the former — are both strategically located at the heart of Jalan Bukit Bintang. The company also holds the rights of first refusal (ROFR) to several properties including a six-storey retail mall to be developed in USJ, Subang Jaya.
“In terms of location, we are looking to further increase our presence in the prime Bukit Bintang area through our current assets as well as two of the ROFRs granted, for Farenheit88 and the proposed extension of Pavilion KL. However, there are limited retail assets in this specific area and it is also our plan to evaluate retail assets in the Klang Valley and other key localities within Malaysia,” CEO Philip Ho told The Edge Financial Daily. Ho noted that the company’s low loan-to-value (LTV) ratio of 20%, well below the 50% cap, provides the financial flexibility to resort to additional debt in order to fund future acquisitions.
Affin Investment Bank noted in an earlier report that a gearing ratio of 30% to 35% would allow the company to raise between RM360 million and RM540 million in debt.
“Going forward though, subject to such acquisition opportunities, we can definitely consider a higher LTV ratio, which is in line with industry norms,” said Ho.
Market observers note that any potential acquisition is unlikely to take place within the immediate term, hence efforts to raise funds via debt or placements for this purpose will only take place from 2014 onwards.
In the meantime, the company will rely on Pavilion KL which forms nearly 96% of its total asset value.
“Pavilion KL is relatively new and having only commenced operations in 2007, we believe there is significant room for improvement on rental yields, net lettable area and other asset enhancement initiatives. The company will be able to provide investors with growth opportunities from its existing portfolio as well through the potential acquisition of additional retail properties,” said Ho.
This article appeared in The Edge Financial Daily, December 19, 2011.
