17 July 2012
Pavilion REIT: Analysis by Hwang DBS Vickers Research
Construction has begun to add 300,000 sq ft net lettable area (NLA) between the main entrance and The Connection (alfresco food and beverages area) by the third quarter of 2015.
Assuming RM20 per sq ft (15% premium to current average rental of RM17.40 per sq ft given lower proportion of anchor tenants) and 68% margin, the extension could boost Pavilion REIT's net property income (NPI) by RM50mil (23% of 2012 forecast NPI).
We value the extension at RM768mil (based on 6.5% acquisition yield hurdle) which can be easily absorbed by the REIT's low gearing (70% debt financing would only increase gearing by 9 percentage points to 28%).
We believe the injection of the extension is inevitable given its proximity and synergies to Pavilion KL (REIT has right of first refusal to acquire from sponsor).
We also do not discount the possibility of new retail space being created should an underground connection between Pavilion extension, fahrenheit88 (owned by sponsor which REIT also has right of first refusal) and the upcoming Bukit Bintang MRT station is built.
There will also be a short-term boost from Pavilion KL's asset enhancement initiative (AEI) and rental reversion.
AEI of turning 68,000 sq ft NLA into a Fashion Street consisting of specialty stores by September will also contribute 2.5 times more rental than previous anchor tenant Tangs which was about RM1.1mil per month.
We understand the area has been fully taken up by 35 tenants, with 40% being new entrants in Malaysia. In 2013, 75% of the mall's NLA is due for renewal with headroom to increase tenant occupancy cost to 15%-18%.
We have assumed a conservative 5% growth in rental in the forecast for 2012 to 2013 and 10% in 2014.
The REIT is riding on strong demand for bigger retail lots. Pavilion KL extension and Fashion Street will complement the mall's profile as a hub for fashion and food and beverages.
High-end brands such as Canali and Sincere Watches are seeking to expand their concept stores to 15,000 sq ft NLA from the usual 5,000 sq ft to 6,000 sq ft, in line with the general retail trend in Asia.
Retail sales at Pavilion KL have ballooned to RM1.6bil per annum, rising 4% quarter-on-quarter in the first quarter of 2012 alone.