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Can SPH REIT Increase Its Distribution Yield Next Year?

SPH REIT‘s (SGX: SK6U) distribution yield has been largely unchanged since its initial public offering (IPO) five years ago. Its initial portfolio of The Clementi Mall and Paragon have given stable rental income throughout. However, stability is not enough in my view. A real estate investment trust (REIT) that has the capacity to grow and increase its yield will reward unitholders much more than one that delivers just stable distributions. With that, here are some factors that could impact SPH REIT’s distributions next year.

Full-year contribution from The Rail Mall

SPH REIT made its first acquisition since its IPO last year. The acquisition of The Rail Mall is yield-accretive. Despite being just a small part of its entire portfolio,  The Rail Mall, due to its much higher capitalisation rate, will boost distribution per unit (DPU) slightly. Moreover, since the mall is the first acquisition that the REIT has made, it is a good sign that the REIT is finally willing to capitalse on its debt headroom.

Right now, SPH REIT has a debt-to-asset ratio of 26%, which is still some way shy of the 45% regulatory cap imposed on REITs. If it can make use of additional debt headroom to make yield-accretive acquisitions, we could potentially see DPU grow in the future.

Negative rental reversion

The rental reversion rate is the difference between contracts renewed in the year against the previous rental rates.

Its Paragon property had a negative 3.7% rental reversion in the 2018 financial year. Higher competition in the central region of Singapore and soft office rental markets were probably the factors. Overall, its entire portfolio had a negative reversion rate of 3.5%, which might impact distributions in the next year.

The table below illustrates the rental reversion rate in the last financial year:

Source: SPH REIT FY18 earnings presentation

Retail market improving

The retail market in Singapore has been facing headwinds in recent years as consumer behaviour shifts and shoppers spend more money online. New shopping malls in the central region have also impacted sales and traffic. However, things could improve in the next year.

Rising tourism is expected to boost sales in the central region, with ground floor rents in Orchard most likely to increase.

Colliers International expects the recovery of Orchard Road rentals from 2018 to 2022. With Paragon located in the heart of the Orchard Roard, SPH REIT’s retail sector could potentially improve.

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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 writer Jeremy Chia doesn’t own shares in any companies mentioned.