KIPing it neighbourly

VALERIE ONG has visited many a mall in the Klang Valley looking for an asset that fits the investment profile of a real estate investment trust (REIT).

And when Setapak Central came up for sale, she did not hesitate.

The KIP-REIT chief executive officer or CEO acquired the three-storey mall in the northern suburbs of Kuala Lumpur.

It is the first asset that the REIT is acquiring in a major urban setting. It is also the single largest acquisition it has made to-date.

The REIT is buying the mall from Singapore-listed Frasers Property Ltd for RM435mil.

At that price, the mall has an estimated yield of 7.2%.

“There are not many malls offering the kind of yields that Setapak Central is offering,” she points out, adding that over the last three years, the REIT has acquired assets yielding between 7% and 7.5%.

“I’ve visited almost all the malls and looking for suitable assets need time. Recently, I visited another one with a group of the mall’s shareholders. It’s all about the yield.

“We will acquire a mall even if it is old but can give a yield of say 8% or 9%. Malls with these yield levels are few and far between in the Klang Valley,” Ong points out.

She shares that the REIT had been in discussions to acquire the mall some years back, but nothing panned out from it. “The time wasn’t right,” Ong says.

The acquisition now is 60%-funded through bank borrowings, with the remainder being funded through a private placement of up to 220 million units that was approved at an EGM in late July.

The issue price for the units was fixed at 81.5 sen per unit.

“We think Setapak Central is the right fit because it is a neighbourhood-centric mall. As for the tenant mix, it’s actually relatively similar to what we have in our portfolio except on a bigger scale,” she says, drawing comparisons with the five-storey D’Pulze Shopping Centre in Cyberjaya, which the REIT acquired in December 2024 for RM320mil (at the time its largest acquisition) from DPulze Ventures Sdn Bhd.

Both Setapak Central and D’Pulze mark a step up in the REIT’s retail asset portfolio, which had mainly focused on properties under its KIPMall brand located in secondary urban centres.

These are smaller malls combining a section selling fresh produce evoking small-town markets but with better and cleaner facilities together with a section offering food and beverage outlets, fashion stores, pharmacies and other community-centric amenities.

Ong says Setapak Central, which raises the REIT’s assets under management to RM2.1bil, will also increase the REIT’s visibility among investors. It will also potentially increase the market capitalisation to RM1bil.

There is also the matter of raising the profile among tenants. The acquisition brings the number of tenants in the REIT’s ecosystem to close to 1,005.

Acquisitions of malls such as D’Pulze and Setapak Central is also about competition to retain tenants and attracting potential ones.

Ong believes the REIT is in a better position in terms of rental renewals because tenants can now choose to expand their presence in the other malls under its portfolio.

“We have the scale and it will be more competitive on both ends in terms of rental negotiations,” she says. The average rental reversion for the retail assets is about 7% for existing tenants with a typical tenure of two plus two years.

The tenure ensures that the mall is able to dynamically manage a tenant mix that reflects consumer trends. For new tenants, the rental increase will be much higher, up to 20% to 25% above existing rates.

“This is what we’re seeing at D’Pulze and Setapak Central will be similar,” she says.

What’s next after Setapak Central? Ong says the REIT’s board of directors will decide but emphasised that for now, the path remains retail-focused where well over 90% of annual revenue is from.

As to whether they will be looking for malls of similar size and location to Setapak Central, she says there will be no constraints as long as it meets the REIT’s investment profile.

“I don’t think we’ll constrain ourselves to this or that kind of mall, but our emphasis is that the asset must be a community-centric mall,” Ong adds.

The same benchmark applies for locations. The REIT’s retail assets are mostly located in the west coast of Peninsular Malaysia.

“It can be anywhere in the country. Take Melaka for example. We’re seeing population growth although at this juncture, we have no immediate plans,” she says. The REIT owns a KIPMall in the state.

Ong says there are no plans to acquire industrial assets.

“It is not going to be our immediate consideration,” she says. Cost is a major concern especially in areas nearer to ports where land prices have doubled or tripled in recent years.

“After taking costs into consideration, the yield comes to around 3%, which will not be very attractive,” she says.

The REIT owns six industrial properties, with one in Bintulu, Sarawak.

It will continue to focus on asset-enhancement initiatives (AEIs) that it has undertaken in recent years. This is crucial as a number of the retail properties are aged 15 to 20 years.

A major initiative is the expansion of the 30-year-old AEON Mall Kinta City in Ipoh. The mall presently occupies 4.05 ha of a 6.1-ha site.

“We signed an agreement to build the expansion on what is now the open carpark, which will be moved to an upper level,” she says.

“I want to focus on AEIs and on quality growth. By embarking on the AEIs, we can then re-look the tenancy mix and let the numbers optimise through the rental renewals,” Ong says.

The AEIs will enhance the property value and bring the gearing down over time. With the acquisition of Setapak Central, the gearing will rise to about 43% from 39%.

“I’ve mentioned this many times, if we are acquiring yield-accretive assets, hovering around 40% to 45% is sustainable and if we’re not acquiring anything, the yearly revaluations will bring the ratio down by one or two basis points,” she says.