The Importance of Lease Expiry Profile in REIT

If you are a landlord owning income producing properties, nothing beats the pleasure of receiving higher rental income from your tenants in the long run.

Similarly, when the tenancies of a REIT expire, we hope that the REIT could retain the tenants or secure new tenants at higher rental rates. In another word, higher rental payment translates into higher income to the REIT and potentially higher distribution to us.

If we dissect Pavilion REIT’s tenants expiry profile for Pavilion Mall, you will notice that there is a lumpy lease expiry in 2016 of which 69% of the mall’s occupied NLAs will be up for renewal. These tenancies account for 66% of the mall’s gross rental income based on information found in its 2015 annual report.

BIG amount of money is at stake here if the REIT fails to secure the renewal of existing tenants or new tenants to occupy the lettable area.

Some of the Pavilion Mall's tenants with lease expiring in 2H 2016 will be GSC, Hermes, Padini, Parkson and Royal Selangor.

If you are the unitholder, you might hope that:

1)  Bulk of these NLAs which is expiring will be renewed at a higher rental rate.

2) Management could secure new tenants if existing tenants opt not to renew the lease.

We should be able to see positive impact on the REIT’s rental income in the next few quarters when the REIT announces its quarterly result if management manage to secure higher lease payment for the expiring tenancies.

2016 is a BIG year for Pavilion Mall, but a lumpy tenancy expiry profile has its pros and cons. It gives the REIT the opportunity to negotiate on higher lease payment. But if the economy slows down significantly, it may affect the REIT’s ability to retain existing tenants or secure new tenants.

Ultimately, it will depend on the retail REIT’s management quality, location and attractiveness of the mall as key factors in securing higher lease payment in the long run.