Retail REITs: New shopping centres add buzz, but where can investors find bargains?

Retail REITs: New shopping centres add buzz, but where can investors find bargains?

Written by Michelle Teo  
Monday, 16 December 2013 14:36
There’s a palpable buzz at the eastern and western ends of Singapore in the weeks leading up to Christmas as two major shopping centres — Bedok Mall and Westgate in Jurong East — opened their doors to the seasonal retail rush. Catering to the suburban sprawl that has developed at the far ends of the island, the malls were teeming with people right after opening on Dec 3, even though not all shops were in business yet.

Bedok Mall is a 50:50 venture between CapitaLand and CapitaMalls Asia (CMA), its 65%-owned unit that develops malls across the region. Westgate is also another CapitaLand group development — a 50:30:20 venture by CMA, CapitaMall Trust (CMT) and CapitaLand.


Analysts note that the newcomers are just two of the dozen or so shopping malls that are expected to open between now and 2017 , adding to the 70-plus shopping centres that are already in Singapore. The Orchard Road shopping district has undergone a revamp over the past few years, and older buildings are being redeveloped, or at least undergoing a facelift. One such mall, The Heeren, recently reopened with a new, more upmarket Robinsons department store taking up some 18,000 sq ft of retail space. Besides the malls that line Orchard Road down to Bras Basah Road, there is at least one in every regional town centre or major HDB estate — Tampines alone has three sizeable malls in a cluster around the MRT station.

Shopping malls in Singapore are largely owned by retail real estate investment trusts (REIT), some of which are units of the property developers. There are nine retail REITs listed on the Singapore Exchange; four of them are purely focused on malls in Singapore, while one, Starhill Global REIT, holds Wisma Atria and Ngee Ann City, along with 11 other regional assets.

CMT has 16 malls and mixed-use developments in the city and HDB heartlands, while Frasers Centrepoint Trust (FCT), a 41%-owned unit of Fraser and Neave, has five suburban malls and a pipeline from its sponsor Frasers Centrepoint that includes The Centrepoint on Orchard Road. SPH REIT holds Paragon and Clementi Mall; Mapletree Commercial Trust’s portfolio includes VivoCity.

Retail REITs have been popular, particularly in recent years, as investors sought out stable yields and sectors that banked on resilient domestic demand. But since then, some industry observers note, domestic consumption has apparently slowed and more shoppers are going online instead. At the same time, rental rate growth has been muted and retailers’ expansion plans are being thwarted by curbs on foreign labour.

Furthermore, the interest rate-sensitive REITs have been a stock market laggard this year, as Maybank Kim Eng points out in a Dec 6 report, underperforming the benchmark Straits Times Index by 6.4% this year, no thanks to the US Federal Reserve’s plan to taper its quantitative easing (QE) programme, which it announced in May. Retail REITs in particular has recorded a negative 6.7% return year-to-date.


“This is in stark contrast to its stellar performance in 2012, when the [REIT] sector recorded a 41% price return and outperformed the STI by 20%,” Maybank Kim Eng analyst Ong Kian Lin writes in the report. “The underlying overhang remains, with the possibility of a spike in cap rates which drags down property [values], with the ensuing escalation in interest rates.”

Is there still growth in the retail REIT sector? Are there bargains for investors? “[It’s] not the time to bottom-fish yet,” Ong says of the REIT sector in general. He argues that while forward yields of 6.5% and 6.7% for FY2013 and FY2014 respectively may seem
attractive, it is still “too early to revisit the sector, given the impending QE taper”.

Nevertheless, according to UOB Kay Hian, the mall operators in Singapore have adjusted their strategies to the challenges, repositioning their appeal and juggling retail offerings to bolster sales. “Bedok Mall is best positioned to capture the suburban mass market, while the influx of retail supply in Jurong East has led Westgate to differentiate its retail offerings,” UOB Kay Hian analysts Vikrant Pandey and Terence Khi write in a Dec 9 report.

Indeed, a steady number of new retailers in the market are helping to support growth. At Westgate, for instance, there are COS, the upmarket sister brand of Swedish retailer H&M; Australian high-street fashion store TEMT; as well as Dubai stores Gisella Blu and Aurora Wild.

REITs typically drive revenue and distribution per unit (DPU) growth by maximising shopper traffic, and UOB Kay Hian notes that asset enhancement initiatives (AEIs) at the older malls either have been planned or are already underway to improve mall performance. “While we expect rental growth to be muted at 0% to 3% in 2014, retail REITs will leverage on AEIs and acquisitions to grow revenues,” UOB Kay Hian says. It adds that CMT’s Bugis Junction, Tampines Mall and Funan DigitaLife Mall, FCT’s Northpoint and Starhill Global REIT’s Plaza Arcade are among those undergoing AEIs soon.

Maybank Kim Eng’s Ong disagrees, noting that “most of the eligible malls in the REITs’ portfolios have already undergone asset enhancements, providing little boost to distributions”. He figures, however, that retail rents will have some support from resilient domestic demand as well as the continued strength of the tourism industry. He adds that there has been no shortage of retailers waiting to enter the market, noting that space in the new malls that opened recently was 90% to 100% leased ahead of opening.

Ong figures that while the retailers themselves may face eroding margins as they contend with a tighter labour market, the impact on retail rents is unlikely to be significant. Rents typically constitute 14% to 17% of total sales for retailers in suburban malls, and 16% to 20% for Orchard Road malls. Still, Maybank Kim Eng has downgraded the retail REIT sector to “neutral” from “overweight” previously.

Meanwhile, UOB Kay Hian says the potential acquisition pipeline for retail REITs would keep the market interested in the sector in the year ahead. According to the brokerage, the properties in the pipeline for CMT could include the new Bedok Mall and Westgate, as well as Star Vista and ION Orchard. Elsewhere, FCT could soon acquire Changi City Point, while Starhill Global REIT has options to acquire assets in Singapore, Malaysia or Australia.

“Valuation capitalisation rates for retail malls remain attractive at 5.2% to 5.8%, while interest rates are expected to remain low. With retail REITs trading at 0.9 to 1.2 times book value and offering forward yields of 5.4% to 6.2%, acquisitions will be accretive,” says UOB Kay Hian.

The brokerage likes FCT for its exposure to resilient suburban malls and Starhill Global REIT, which “offers [the] highest yield for a Singapore-centric retail REIT, with exposure to the prime Orchard shopping belt”


Source/Extract/Excerpts/来源/转贴/摘录: theedgesingapore.com
Publish date: 16/12/13