Will CapitaLand Mall Trust be Able to Keep Increasing its Revenue?

CapitaLand Mall Trust (SGX: C38U) has been able to deliver an increasing distributable income since it got listed in 2002. To the point, between 2003 and 2015, the real estate investment trust’s distributable income had grown by 16.2% annually.

One of the levers that CapitaLand Mall Trust can pull to increase its rental income would be positive rental reversions, or the increase in rental rates. With concerns around a slowdown in the growth of Singapore’s economy, a question was raised during a recent briefing – for the REIT’s 2015 fourth-quarter earnings – on what rental reversions for the REIT will look like in the current year.

Wilson Tan, the REIT manager’s chief executive, had the following reply:

“I do not have a magic crystal ball to gaze into.

But I remember very clearly at the very beginning of last year, when we did 4.1% rental reversions – I did not guide, but I did state that the pressures will be one where we will continue to see a decline in terms of rental reversion. The rental reversion that we saw from 4.1% to 3.7%. We are not surprised by it.”

He also touched on the challenges that tenants and businesses are facing and how it may trickle down to CapitaLand Mall Trust’s business:

“There could be a situation whereby one may ask, why are we seeing this? Is there any structural things that are happening? What can we gather, moving forward? What’s going to be the rental reversion?

I reckon that this year, there is a possibility that in some quarters, we will see, or we could see, we may see a negative rental reversion.

And, that is one driven more by the structural changes that we are seeing happening in Singapore, that will have an impact, I believe cutting across industries.

For a mall operator, that’s where we seem to see some of these structural changes coming about. Structural changes as in overall cost that is impacting our economy. I spoke earlier about cleaning, about security, I did not talk about landscaping cost at all – but the government, over the past two to three years, has seen and has driven in terms of a progressive wage model. These cost are rising as much as 30%. That’s gonna have an impact on us.

The other are that we continue to see is that the pump prices are not coming down. The oil pump prices are not coming down. So, you have brent crude prices coming down but look at our pump prices, it’s not coming down. Cost of transportation has not come down. Cost of transportation will cut across every sector of the economy. And that is where again, from a structural standpoint, you would see cost going up.

With all these, I think there will be an increased pressure on businesses. This would then mean that some artificial ceiling will be put in place, because you cannot go and continue seeing cost increases and keeping the businesses keeping the lights on. So, I think at some point of time, some of these businesses will shift, will go out, will leave the marketplace but those who stay behind will also see an increase in terms of the cost structure.

This will have a derivative impact on cost increases. So, that’s where, I believe structurally the rental market will be affected too.”

However, Tan remained confident about the malls that CapitaLand Mall Trust has in its portfolio and he gave his reasoning for that:

“So, my sense, to make it very short and sharp, I think that there will be still some downward pressure in terms of rental reversion, there may the possibility in some quarters where you may have negative rental reversion.

However, I have to say that for 2016, I am still expecting a positive rental reversion.

The way and why I have the confidence is because of the malls that we have. The key differences is the position of our malls as a necessity mall. The second is the location of our malls – location, location, location – is also very important in the mall business, where it is in transportation hub areas and it is also at strong catchment areas. And that’s where I am confident that we will continue to see a positive rental reversion.”

For perspective, CapitaLand Mall Trust managed to produce positive rental reversion of 3.7% in 2015.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.