Singapore REITs - UOB Kay Hian 2016-06-01: Challenging Retail Climate

Singapore REITs - UOB Kay Hian 2016-06-01: Challenging Retail Climate Singapore REIT STARHILL GLOBAL REIT P40U.SI  CAPITALAND MALL TRUST C38U.SI  FRASERS CENTREPOINT TRUST J69U.SI 

REITs − Singapore: Challenging Retail Climate

  • The retail environment remains challenging amid increased retail space, rising operating costs and growing usage of online retail channels. 
  • Consequently, retail landlords have been guiding for a moderation in rent reversions as they change their mall mix to favour more experiential based tenants. Starhill Global is likely to display more resilience in an otherwise lacklustre sector, with its diversification across geographies and role as a potential beneficiary of international tourist pick-up. 
  • Maintain OVERWEIGHT.



WHAT’S NEW

  • We review the operating dynamics of the retail segment amid the challenging retail climate.


ACTION

  • We prefer Starhill Global REIT within the retail segment as it is likely to display more resilience in an otherwise lacklustre sector, with its diversification across geographies and as a potential beneficiary of international tourist pick-up.


ESSENTIALS


Challenging retail environment

  • Challenging retail environment, with Starhill Global likely to display more resilience in an otherwise lacklustre sector, with its diversification across geographies and asset classes. 1Q16 saw overseas assets comprise 38.3% of gross revenue. 
  • Bearing in mind the lack of office supply in Orchard, the office component (100% occupied) contributes 13.7% to gross revenue. Increased retail space, rising labour costs and threat from alternative retail channels have in part prompted retail landlords CapitaLand Mall Trust (CMT) and Frasers Centrepoint Trust (FCT) to guide for a moderation in rental reversions.

Starhill Global REIT is a potential beneficiary of international tourist pick-up

  • Starhill Global REIT is a potential beneficiary of international tourist pick-up, with Orchard properties Wisma Atria and Ngee Ann City making up 66.5% of overall portfolio value. 
  • We reckon demand could see a pickup in tandem with resurgent visitors from Indonesia and China, despite the current softening rentals in Orchard (4.9% decline from 4Q14’s peak). Visitor arrivals in Mar 16 saw the third consecutive month of double-digit yoy growth, underpinned by spectacular growth from China (+83.7% yoy), and the nascent pick-up from Indonesia (+12.5% yoy). 
  • 4Q15 STB data indicated that shopping accounted for 45% of Chinese tourism receipts, and 28% of Indonesian tourism receipts in 2015.

Increasing defensiveness among retail REITs

  • Increasing defensiveness among retail REITs, as landlords move towards a more conservative tenant mix. 
  • We note that CMT and FCT have in recent times been steadily favouring higher food & beverage tenant concentration, while quietly lowering the more cyclical fashion mix. The shift towards more experiential based tenants protects against the threat from online retail channels but it comes at the expense of margins.

Lease expiry profile. 

  • With about 18.3% of leases by gross rent (GR) upcoming for renewal, Starhill Global would face the lowest renewal risk over the next two years. 
  • Given the present weak retail sentiment environment, FCT could well see the highest leasing risk, with 50.5% of leases by GR due for renewal over the next two years. 
  • CMT is next with 48.7% leases due for renewal.

Retail occupancy comparison. 

  • Starhill Global’s Wisma and Ngee Ann City have registered 94.8-100% and 99.2-100% in respective occupancies since 2010. 
  • CMT has similarly been no slouch in maintaining high occupancies at 94.8-99.8% in the same period. 
  • FCT, which has seen occupancy at 82.9-99.4%, is likely to see pressure on occupancy as its Northpoint asset undergoes refurbishment (Mar 16- Sep 17).

Rental reversions. 

  • FCT had, for the most part, registered healthier quarterly rental reversions (3-27%) since 2010. CMT, on the hand, reported quarterly reversions within a tighter range of 1-8% during the same period. Both landlords, however, are similarly expecting near-term pressure on rental reversions. 
  • CMT could see negative reversions in one of the upcoming quarters as it continues to reposition JCube. 
  • The ongoing AEI project at Northpoint should also impact FCT’s rental reversions going forward.

Gearing comparison. 

  • Gearing among retail REITs under our coverage has witnessed a downwards trend since 2012. 
  • Generally FCT has had the lowest gearing (with gearing below 32% since 2010), while CMT’s gearing (33.7-39.9%) has ranked highest among the three retail REIT managers since 2010. 
  • Starhill Global, with its previously low gearing of 28.7-31% since 2010, saw gearing spike post 2Q15’s acquisition of Myer Centre Adelaide in Australia, to its current level of 35.4%.


PEER COMPARISON 





Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-06-01
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.91 Same 0.91
HOLD Maintain HOLD 2.05 Same 2.05
HOLD Maintain HOLD 2.15 Same 2.15


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