Rating: Buy (price target: S$2.18)
We think CapitaMall Trust (CMT) will continue to benefit from its earlier asset enhancements such as at Bugis+ and Atrium@Orchard. Greenfield developments such as Westgate should also help underpin future distribution growth. Our checks indicate Westgate (416,000sqft retail NLA) is >85% pre-committed, and will complete by December 2013, with average signing rents in the S$15-16psf/month range. Contributions should ramp up more meaningfully in H114 after the initial fit out period.
In the broader retail sector, occupancies remain high and stable at around 94%, driven by a structural shift of international retailers building up their Asian presence and leveraging on Singapore as a platform to Asia. Leasing interest for suburban retail space is well supported by necessity shopping amidst a growing population, low unemployment rates, and relatively benign retail supply.
A key pushback on retail is the impact of the government’s stricter immigration stance on tenant margins via higher wages, and lack of suitably trained staff for expansion. We think local specialty stores are likely to be the hardest hit. On the other hand, established global and regional retailers, which are the fundamental tenant blocks for listed REITs, have greater flexibility to allocate resources and cross-subsidise across the store network. We think there is further potential for landlords to attract global brands with larger budgets as only 39.9% of global retailers are present in Singapore. As the second most popular Asia-Pacific location for global brands, we think Singapore will continue to appeal to global retailers as a launch pad into the region.
Positive catalysts include the announcement of more asset enhancements to maximize underutilised GFA or to increase rental yield potential, and positive data points on market rents and occupancies. From a macro perspective, earlier-than-expected tapering of QE in the US could lead to interest rate volatility and potentially negatively impact the share price.
Our DCF-derived price target of S$2.18 assumes a 2.4% risk-free rate.