Interview with the CEO

Dato’ Hisham bin Othman
Executive Director and Chief Executive Officer

Interview as published in Hektar REIT's 2017 Annual Report.

How would you describe 2017 as a year for Hektar Reit? Would you consider it to be a good year or a bad one?

Under the challenging circumstances, I’d say it was a very decent year for Hektar REIT. We were able to overcome or mitigate many pressures on revenues and costs and by the end of the year we were able to post reasonably good results and declare favourable returns for our unitholders. At the same time, we embarked on our strategy to improve the position of all our shopping centres with respect to Asset Enhancement Initiatives (AEI) and tenancy remixing in order for them to remain attractive and relevant to customers beyond 2017. Overall, it was a year of challenges, adaptation and renewal.

Early 2017 saw continued pressures on the retail industry. The year began with a reported 1.2% contraction in retail sales within Q1 2017. Focusing on our fundamentals, we pursued tenant remixing, AEIs, energy efficiency initiatives and aggressive marketing to continue creating value. As 2017 drew to a close, we were able to gain not only higher revenue, but also a larger portfolio than the preceding year. We believe we are now in a strong position for the future.

What were the challenges that Hektar Reit faced in 2017?

Three key trends gained much prominence in 2017.

Firstly, we had to face substantially subdued consumer appetite throughout the year. This was due to a combination of inflationary pressures from an underwhelming Ringgit, high domestic borrowing as well as hangover from the implementation of GST, with an environment of largely flat household incomes. Due to the decline in purchasing power, the Malaysian consumer became a very careful spender in 2017, resulting in reported retail sale growth of only 1.9% for the first 9 months of the year. To compound matters, we had to face increased competition from existing and new shopping centres which offered competitive rates and benefits to lure tenants.

As 2017 drew to a close, we were able to gain not only higher revenue, but also a larger portfolio than the preceding year. We believe we are now in a strong position for the future.

Secondly, we have seen some shifts in consumer behaviour in the advent of the digital economy and e-commerce. In 2017, e-commerce penetration in Malaysia rose to 5%, with estimated total non-travel e-commerce spending of RM5 billion throughout the year. Whilst small when compared with the total annual retail sales level in the country of around RM100 billion, the effect of the digital economy on consumer behaviour and lifestyle were wide-ranging and, arguably, permanent.

Thirdly, the oversupply of shopping centres in the Klang Valley and Melaka has also presented stiff competition for our shopping centres there and this affects not only our visitors footfall, income from rental, and tenant sales, but it also impacted the retention and sourcing of quality employees. The oversupply contributed to lower revenues as prospective tenants had more options and leverage in the market.

How did Hektar Reit respond to these challenges?

Addressing the first concern which is the change in consumer habitual spending, we focused more on customer engagement to encourage more spending and increase visitations per customer. On top of ground marketing, we have assumed a more specific strategy in relation to the before and after retail experience on our online platform to drive traffic to our shopping centres and collect experiential reviews. Apart from that, we aimed to increase customer’s dwell time in our shopping centres and repeat visitations by focusing on developing and maintaining retail environments that are favourable to consumers and retailers alike. We continuously adapted our tenancy mix to changes in consumer needs, taste and lifestyle. We now carry higher food & beverage, entertainment, recreational and sports content to facilitate consumers congregating in our shopping centres to not only shop, but also to spend quality time with their friends and family. As for the less urban malls, we kept them exciting by introducing new brands with quality and trendy products within closer reach of suburban and town-centric consumers, hence reducing their need to travel afar for a quality shopping experience. We have also been improving our facilities to make it more pleasant and comfortable to our shoppers.

Relating to the rise of e-commerce that has begun to change the retail structure, we took a three way approach to addressing this challenge. There are substantial findings showing the inter-dependence of online stores and brick-and-mortar presence. Consumers still want to experience, smell, touch and feel the items they intend to purchase; therefore the omni-channel is important for long-term viability. We collaborated with our tenants and partners to enhance the retail experience by focusing on customer satisfaction through stronger marketing campaigns such as rewards programs in our shopping centres that cannot be replicated online. We then also encouraged our tenants to be active both in-store and online to increase their brand presence. Lastly, to keep our customers excited and also to entice the online retailers to set up a permanent store in our shopping centres, we provided these online retailers a platform to grow their customer presence through temporary pop-up stores and weekend bazaars.

Flexibility is key in the ever-changing industry. As part of our corporate strategy, we sought to optimise our portfolios through value creation initiatives which included asset enhancements, creation of additional net lettable area (NLA), and reconfiguration of lots or conversion of space to help grow income and allow for more retail outlets. These initiatives were carried out in Subang Parade, Kulim Central and Mahkota Parade in 2017. We also begun to plan for Segamat Central. Our major project this year was in Kulim Central, which has been successfully completed within budget and schedule.

To ensure that our company continues to perform, we have strengthened our human resource, by sourcing for the industry’s top talents by reviewing our recruiting process and enhancing our team’s competencies by selecting key personnel to undergo industry trainings to become more effective and productive.

All in all, we believe that our commitment towards continually adapting to our consumer base has helped to keep Hektar REIT’s shopping centres relevant to the lives of their respective communities.

What did you mean by 2017 as a year for renewal?

2017 was an important milestone in our journey, a period of new beginnings within an environment that is undergoing structural change, in Malaysia and across the globe to continue being part of the lives of the community required for our portfolio of shopping centres to undergo the process of renewal. In this regard, the year has seen the rebirth of Kulim Central following its AEI, which added net lettable area of more than 20,000 sq. ft. with substantial experiential, functional and cosmetic improvements, a brand-new food court that now offers local delights within a modern setting, as well as a richer retail experience from an expanded tenancy mix.

Subang Parade is also undergoing change to further reinforce its position as Subang Jaya’s main community shopping centre. It is currently undergoing a tenancy remixing exercise and we have already initiated a much anticipated AEI. This initiative was designed to create additional NLA to accommodate more food & beverage outlets, in addition to delivering improvements to the shopping centre’s façade as well as providing shoppers and visitors with an enhanced retail experience. Upgrades to the cinema are also underway to provide moviegoers with an even more enjoyable cinematic experience.

We have also engaged in an aggressive tenancy remixing exercise in Mahkota Parade as we adapted to the changing needs of the local market as well as capture a sizeable portion of the growing tourist market. As a result, the shopping centre is now host to a wide range of prominent, big-name brands, with many of these brands having chosen Mahkota Parade as their maiden location in Malacca. This exercise was further supported by equally aggressive marketing efforts, including numerous events and promotional activities, to further strengthen Mahkota Parade’s position in its market.

Our commitment towards continually adapting to our consumer base has helped to keep Hektar REIT’s shopping centres relevant to the lives of their respective communities.

As part of our commitment towards a greener planet, we have embarked on energy efficiency and management initiatives across all our properties. In terms of electricity consumption, the redesign, retrofitting and realignment of the operational models at each site are projected to, when completed to deliver an aggregate annual reduction in CO2 emission of 13.8 million kg (based on 0.94kg of CO2 emission per KWh of electricity consumption). In 2017, this initiative has already contributed to a 4% reduction in electricity costs.

Finally, we are proud to welcome Segamat Central into our stable of neighbourhood shopping centres. We plan to bring to Segamat Central a much-improved retail experience to its local community, and shall continue to improve the retail mix of the shopping centre, as well as enhance its appeal.

What would you consider as the key highlights of 2017?

We have created for ourselves several areas of considerable potential for long-term growth. Our tenancy remixing exercises drive organic growth through continuous improvements in the retail mix for our shoppers and visitors, whilst the completed AEI at Kulim Central will provide a substantial boost to the overall value offered by the shopping centre. Our acquisition of Segamat Central has also taken our portfolio size to beyond 2 million sq. ft., whilst offering good potential for value creation and enhancement.

In early 2017, we embarked on a programme aimed at improving existing air-conditioning and mechanical ventilation (ACMV) systems. Following audit and analysis, we are now in the process of acquiring an estimated 30% reduction in electricity consumption of ACMV systems. This shall be acquired through, amongst others, the installation of energy-efficient chillers, pumps and cooling towers, application of variable and dynamic building controls and automation systems as well as implementation of best practices toward MS 1525 compliance.

We are also encouraged by having been awarded “Best in Online Presence” at the Focus Malaysia Best Under Billion Awards (BUBA) 2017, which was the industry’s recognition of our commitment to adequate, accurate and timely disclosure to our stakeholders.

What do you consider as the most important factor moving forward?

Our commitment to meeting and exceeding the expectations of all our stakeholders.

We need to continue engaging with our shoppers, consumers and visitors to not only keep in touch with current preferences, but also anticipate and prepare for future trends. We also need to work together with our tenants in driving turnover levels even further for mutual growth. Our workforce needs to be continually enriched not only with skills and knowledge, but also a safe and healthy working environment. We also must continue to do our part for the planet and our community. Most importantly, we need to continue to focus on our financial performance to ensure that our track record of 11 years of attractive and consistent Dividend Per Unit (DPU) to our unitholders is maintained.

This commitment has been key to our performance over the years. Moving forward, we shall continue to anticipate changes in consumer behaviour, develop and maintain a loyal base of tenants, build a diverse, capable and driven workforce, persist in reducing our carbon footprint, become a key member of the various communities we are in and deliver our promise to our unitholders.

What should we expect to see in the near future?

You shall see continuation of our efforts towards becoming a much bigger part of the lives of the communities in and around our shopping centres. Our shopping centres shall become the go-to destination for friends and families to create memorable moments and spend quality time together. Their visits shall be enriched by the various recreational, sports and entertainment options available on-site for a wholesome lifestyle experience. Our shopping centres shall also provide local enterprises with the space and opportunity to grow and thrive.

We shall continue our strategy of identifying potential targets which meet our acquisition criteria in order to grow Hektar REIT’s portfolio of shopping centres.

We will continue with our cost optimisation drive and find new ways to lower our operational costs across all centres to ensure that the returns to our unitholders remain sustainable.

We do realise that sustainable growth shall be difficult without commitment to exceptional corporate governance and exemplary corporate citizenship. We shall continue to practice prudence, with sound risk management and compliance to all regulatory requirements.

You shall see us continuing to enhance our shopping centres through AEI with a focus on creating the shopping centres of tomorrow. Our journey is also going to be one driven by growth, both organically as well as via acquisitions. We shall also strive to continue to deliver good and stable returns to our unitholders in appreciation of their support and loyalty.

These are indeed exciting times for Hektar REIT.