AL-SALAM REIT ANNUAL REPORT 2018

AL-SALĀM REIT ANNUAL REPORT 2018 48 1. Economic Overview The global economy continues to grow at a moderate pace amid a brittle demand and lessened trade lows. There are growing risks to the global growth tilted to the downside, predominantly due to factors related to trade policy uncertainty and weakening inancial market sentiments. There are still lingering uncertainty in trade directions when the ceaseire on the US-China trade war ends on the 1st March 2019. The mounting trade tensions together with other emerging concerns, including slower growth than expected in emerging market economies and the US government shutdown, are causing instability in the inancial market. Domestic demand is expected to grow by 5.1%, underpinned by a robust albeit slower growth in private consumption at 6.4%. Consumers are most likely to go for cautious spending due to the concern of the so-called "high cost of living", although prices are under control and household debt burden is declining. The average headline inlation for 2018 was tamed at 1.0%, below the earlier expectation. The 2019 headline inlation, however, is expected to be higher at the average rate of 2.0% due to expansionary policy to support domestic demand and a weak ringgit foreign exchange. The Ringgit is afected by the volatility of the inancial market as short-term investors continuously rebalance their portfolio due to monetary policy diferential as well as heightened policy uncertainty among developed nations. The balance of portfolio investment for the irst half of 2018 was in the red (-RM40.9 billion). At the same time, a weakened external demand was also adding up to the downward pressure on ringgit. (Extracted from Oicial Website of Malaysian Institute Economic Research) 2. Malaysian Reit The sector has faced an early dampener of 25bps overnight policy rate (OPR) hike to 3.25%on 25 Jan 2018which would nudge up near- term’s inancing costs (for M-REITs with exposure to loating rate borrowings). This was followed by a short-lived, sector-wide unit price easing in Mar-Apr 2018 which we believe was partly attributed to the market’s expectation of two rate hikes in 2018 (including Jan 2018’s). Elsewhere, there were selective, major asset acquisitions/ developments in 2018 YTD, i.e Pavillion Elite (acquired in Apr), The Green Leaf Niseko Village (acquired in Sep) and Nestle DC @Axis Mega Distribution Centre (commenced in Jun) The M-REIT’s growth is estimated to be largely organic in 2019, via positive rental reversions and sustained occupancy rates while there are M-REIT’s which would record full year rental income contributions from assets which were acquired/developed in 2018 (i.e Axis, PavREIT, YTLREIT). It is expected 2019’s acquisition pipeline to be subdued and only involving smaller size assets as anticipated major pipeline and developments would only take place from 2020 onwards, such as Lot 185, Lot 91 and City Point Podium by KLCCP, completion of Phase 2 Development at Axis Mega Distribution Centre by Axis and Mid Valley Southkey Megamall by IGBREIT. Our 2019-2020 forecasts have only imputed: (i) purchase of 22 QSR properties by ALSREIT, and (ii) development and acquisition of two industrial properties by Axis. Oversupply of retail and oice space would remain as major earnings risks to M-REITs as it would generally heighten selected retail malls and oice towers’ occupancy risks and limiting potential positive rental reversions for expiring leases. Elsewhere, it is believed further rate hike(s) would lower M-REITs proitability (higher inance costs) and deterring acquisitions (more expensive to fund acquisitions via borrowings). Nonetheless, it is expected that the current OPR to remain at 3.25% throughout 2019 to support near-term, economic growth while our sensitivity analysis reveals that a further 25bps increase in inance costs would only lower the sector’s CY19/ 20 net proit by 0.5% p.a.. (Extracted from Research report 2019: Outlook & Lookouts by Maybank IB Research, 14 December 2018) 3. Retail There are three retail malls to be ready by end of 2018. These three long-waited malls will ofer a variety of shopping and entertainment experiences to locals and visitors in Iskandar Malaysia. Midvalley Southkey Megamall, Princess Quay Shoplex and Capital 21 will provide another 3.13 million square feet of new retail space to the market. The current supply of retail space in Iskandar Malaysia stood at 17.53 million square feet which will increase to 20.66 million square feet when the above-mentioned three malls commence operation as per schedule. Approximately 5.3 million square feet of retail space entered Iskandar Malaysia for the past two years, and another 2.5 million square feet will come on stream in the next few years. By then, the newly completed and incoming supply will eventually form 44% of total retail space in IM. Market Report Summary