Weakening consumer spending a new reality for retail malls

AmBank Research says there are signs of a weakening in consumer spending and that will hold back the recovery of tenant sales.

“Maintain our NEUTRAL stance on the REITs sector. Although 1Q2022 saw improvements in retail sales, footfalls and consumer sentiment, we expect a decline in consumer spending ahead due to higher interest rate and inflationary pressures.

“The spillover effect of a weakening consumer spending is envisaged to hold back the recovery in tenant sales. Hence, we expect rental reversion to stay flattish for malls in prime locations and possibly adverse reversion for less established malls,” it says.

The analyst firm says REIT distribution yields will continue to be unattractive due to the decline in yield spreads between CY22F REIT distribution and the 10-year Malaysian Government Securities (MGS).

With all retail stores allowed to fully operate after the reopening of the economy and borders with no further lockdown expectations,

Lower consumer spending

Covid-19-related support offered to tenants will cease in the coming quarter. This will lead to a normalisation of rental income in the retail segment.

“While stronger recovery is seen in malls in prime locations, we expect lower consumer spending moving forward due to higher interest rates and inflationary pressure,” says AmBank Research.

Hawkish expectations of US Federal Reserve (Fed) rate hike triggered the surge in the 10-year US treasury yield (UST) which consequently led to an increase in the 10-year MGS yield.

“Looking forward, we believe that market sentiment on REITs will remain lacklustre due to the unappealing offering to yield-seeking investors. The targeted average CY22F distribution yield for REITs under our coverage is 5.2%.”