Singapore Retail REITs - OCBC Investment 2018-09-04: Tough To Call A Bottom

Singapore Retail REITs FRASERS CENTREPOINT TRUST SGX:J69U MAPLETREE NORTH ASIA COMM TR SGX:RW0U

Singapore Retail REITs - Tough To Call A Bottom

According to URA data, Singapore’s q-o-q retail rental growth reverted to negative territory in 2Q18 after surprising with positive growth in 1Q18.
The decline in 2Q18 rentals was broad-based, coming in at -1.0% and -1.6% for the Central Area and Fringe Area, respectively. This culminated in an overall 1.1% dip for the Central Region.
Recall that rental growth had been negative for 12 consecutive quarters from 1Q15 to 4Q17 before the trend reversed with a slight 0.1% improvement in 1Q18. Unfortunately, the weakness seen in 2Q18 highlights the challenges still surrounding the retail sector.
Nevertheless, we note that CBRE data painted a contrasting picture, as rents for the Suburban sub-market grew 0.5% q-o-q to S$29.10 psf/month, while all the other sub-markets had unchanged rental rates (Orchard Road: S$31.45; City Hall/Marina Centre: S$22.10; Other City/City Fringe: S$17.10). We believe this highlights the difficulty of calling for a bottom given varying data points.

Separately, Colliers highlighted in its semi-annual retail report that it expects ground-floor rents, particularly in the Orchard Road area, to steer the gradual rental recovery from 2018 to 2022.

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Meanwhile, Singapore’s retail sales excluding motor vehicles grew only 0.2% y-o-y for the month of Jun. This was softer than the preceding months, besides Jan, which was distorted by the CNY effect.
For Jun, the key drivers were Petrol Service Stations (+9.3%), Medical Goods & Toiletries (+5.8%) and Recreational Goods (+5.7%), but partially offset by Computer & Telecommunications Equipment (-8.5%) and Watches & Jewellery (-6.3%). The total retail sales value in Jun was estimated at S$3.9b, of which only 4.1% was contributed by online retail sales, according to the Department of Statistics Singapore.

Looking across the performance of the retail REITs with significant local exposure, we note that Frasers Centrepoint Trust had another strong quarter of rental reversions at +5.0% for 3QFY18. This was led by Northpoint City North Wing (+25.8%), which saw an expansion in operations by an existing financial institution tenant.
OUE Hospitality Trust’s Mandarin Gallery continued its momentum, recording a positive rental reversion of 5.1% in 2QFY18 after an uplift of 2.2% in 1QFY18.
Suntec REIT's Suntec City Mall also saw positive rental reversions due largely to replacement tenants. The mall appears to be stabilising, in our view, following its major AEI from 2012 to 2015. Tenants’ sales and footfall continue to be mixed as retailers continue to grapple with competition from e-commerce and landlords seek to differentiate their experiential offerings.
Within the retail space, we like Frasers Centrepoint Trust [Rating: BUY; Fair Value: S$2.49] and Mapletree North Asia Commercial Trust [Rating: BUY; Fair Value: S$1.42]. For the latter, we note that although Hong Kong retail sales growth of 7.8% y-o-y missed the street’s median +9.7% expectations, overall 7M18 value of total retail sales still rose 12.6%.

Andy Wong Teck Ching CFA OCBC Investment Research | https://www.iocbc.com/ 2018-09-04

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