STI: 'Rental vital for share profits'

March 20, 2009

'Rental vital for share profits'

REITS are the main reason why landlords are reluctant to lower rents: Their responsibility to shareholders precludes this, experts say.

 

Many shopping malls form part of Reit - or real estate investment trust - portfolios, and these investment vehicles have been hit hard by the slump in the stock market.

 

To keep earnings up, the experts said, rents have to be kept at certain levels.

 

Mr Mohamed Ismail, chief executive officer of real estate giant PropNex, said Reits are often 'answerable to their shareholders, who were given projected returns at year end'.

 

'The revenue of shares is purely dependent on rental because it makes up the bulk of a landlord's profits,' he added.

 

'Lowering rents equates to lowering shareholder returns and share prices. This erodes a company's viability and can be detrimental.'

 

Put simply, Reits are special investment vehicles that apportion the value of a piece of real estate into shares, which can then be bought and sold on the stock exchange.

 

There are 21 Reits listed on the Singapore Exchange, and their portfolios include shopping malls, hotels and even carparks.

 

The stock market downturn has affected them badly: A recent report by CB Richard Ellis said the market capitalisation of Singapore Reits fell 53per cent between June30 and Dec31 last year.

 

Barclays Capital economist Leong Wai Ho said: 'Being in this position, Reits will be very hesitant to take further moves to lower their yields.

 

'The first thing they will do is to extract a decent yield from tenants, because this directly affects their share prices and profitability.'

 

Apart from their responsibility to shareholders, landlords are also shying away from lowering base rents because of profitability concerns and the fear that doing so now will result in a trend that will be difficult to reverse once business picks up.

 

Most retail landlords, said Mr Ismail, earn up to 20per cent profit after costs - mortgage loans and interest, property tax, and expenditure on maintenance and staff - are deducted.

 

'They have to be profitable, and cutting rents by 20per cent could mean operating below the profit line,' he added.

 

This explains why landlords are baulking at blanket rate cuts.

 

When interviewed, CapitaLand, AsiaMalls and City Developments said they preferred to engage with tenants on an individual basis.

 

Frasers Centrepoint, Far East Organization, Paragon and Wisma Atria were unable to comment, but The Straits Times understands they are taking a similar stance, and that at least one has already started giving individual rental discounts.

 

CapitaLand explained that individual rebates are a more equitable way of helping tenants. Doing so allows it to single out stores with smaller or no profit margins and help them out.