CAPITALAND MALL TRUST (SGX:C38U)
MAPLETREE COMMERCIAL TRUST (SGX:N2IU)
FRASERS CENTREPOINT TRUST (SGX:J69U)
MAPLETREE NORTH ASIA COMM TR (SGX:RW0U)
CAPITALAND RETAIL CHINA TRUST (SGX:AU8U)
Singapore Retail REITs - Beating The Odds
- Retail S-REITs achieve near-full portfolio occupancies, while flagship malls excite with double-digit reversions.
- But channel checks suggest that recovery in the local retail scene may still have legs.
- Yield spreads are trading above the historical mean, which should compress given the retail sub-sector’s higher DPU growth profile vs peers.
- Amid slower growth outlook, favour resilient names with clear growth catalysts: CapitaLand Mall Trust, Mapletree Commercial Trust, Frasers Centrepoint Trust, Mapletree North Asia Commercial Trust and CapitaLand Retail China Trust.
CY4Q18 Results Round-up
Operations showing signs of turnaround.
- True to our non-consensus expectations, 4Q18 proved to be a defining quarter for retail S-REITs, particularly for CapitaLand Mall Trust (SGX:C38U), which returned to growth in FY18 after a three-year hiatus. DPUs came in c.2% higher y-o-y, surprising on the operational front. Rental reversions were strong across sub-markets and often corroborated closely with improving underlying tenant sales growth – a positive sign that landlords are turning the corner.
- Overall, larger malls tended to fare better, likely due to their diversity of offerings, and are likely to remain a recurring theme going forward. The strong performance by various S-REITs’ flagship malls also validates this trend.
- In the recent quarter, SPH REIT (SGX:SK6U)’s iconic Paragon mall impressed with double-digit rent reversions of c.+10.1%, but it was suburban landlord Frasers Centrepoint Trust (SGX:J69U)’s Causeway Point which led the pack with rental reversions of +11.1%.
- Meanwhile for FY18, we observed that CapitaLand Mall Trust’s prime retail space (i.e. The Atrium@Orchard, Clarke Quay and Plaza Singapura) delivered the strongest reversions of c.+3% compared to its suburban assets such as Junction 8 and Tampines Mall, which saw rental reversions of almost +2%. Soon after its successful acquisition by CapitaLand Mall Trust, rent reversions at Westgate have also finally turned positive, which surprised investors.
- Additionally, occupancies across retail REITs’ local asset portfolios (except for Starhill Global REIT (SGX:P40U), which has been experiencing softness in its Singapore retail operations), have also remained stable, if not higher.
Steady earnings improvements translate into higher asset valuations.
- Market cap rates (based on a blend of CapitaLand Mall Trust and Frasers Centrepoint Trust’s portfolios, which are typically revalued on a semi-annual and annual basis respectively) compressed by another 15bps in 2018 vs 45bps in 2017, suggesting an improving operational outlook among retailers and mall operators.
- While CapitaLand Mall Trust’s cap rates have remained stable since June, we note the net increase in portfolio valuations (excluding Westgate, Raffles City and Funan) by c.S$35m on a sequential basis, reflecting the broad-based NPI improvement of its underlying assets.
Retail S-REIT Cluster to Remain Attractive Given Defensive Attributes
2019 shaping up to be a banner year for new retail spaces, but strong pre-leasing activity mitigates supply risks.
- Notwithstanding the spike in completions coming through in 2019 (mainly in the Eastern region, from Paya Lebar Quarter, Funan and Jewel Changi Airport), recent datapoints that have emerged through our conversations with S-REIT managers and industry channel checks indicate healthy pre-leasing momentum.
- As at end-2018, over 90% of retail space at Jewel had been taken up, while Funan is currently c.80% committed on an active leasing basis, despite having rescinded its contract with potential anchor Newstead Technologies. Given this, we expect net absorption of retail supply to remain positive in 2019F-2020F.
Market rents set to trend higher despite structural headwinds.
- Retail rents recovered strongly in 2018 and have stabilised after emerging from a period of market correction starting 2H15, where weakening retail sales and demand from retailers set forth a wave of tenant remixing and recalibration of rental structures among retail landlords, in order to maintain healthy occupancies.
- Although retail malls face structural headwinds from e-commerce competition, we believe the suburban malls owned by the retail REITs are typically well located and are connected to MRT stations which have a natural catchment of consumers and account for a large proportion of non-discretionary spending, which are more difficult for online plays to dislodge.
- After staying relatively range-bound over the last few years, retail sales have picked up modestly in recent months on the back of improving consumer sentiment, particularly in August and September 2018, which saw RSI ex-motor vehicles pushing to 102.6-102.7 (implying growth of 2.2-2.3% y-o-y), the highest observed level since January 2015. Coupled with the projected increase in tourist arrivals in 2019, this should translate into higher retail rents.
Flattening yield curve an impetus to further S-REIT price outperformance.
- Since the start of 2018, S-REITs share price performance have generally underperformed the Straits Times Index (STI) but caught up in 4Q18 as the Fed turned more dovish on further hike momentum. We further discussed the positive impact of the Fed’s pause in our recent report: Singapore REITs - DBS Group Research 2019-02-11: Riding On Macro Tailwinds.
- To summarise, a flattening yield curve is generally positive for S-REITs – our analysis returned a -0.5 correlation between the yield curve and S-REITs share prices, on average. DBS economists are now projecting the Singapore 10-year bond yields to rise by only 25bps by end-2020 to 2.35%, vs 2.70% previously, which is positive for REITs.
Retail REITs offer attractive yields; steady DPU growth underpins positive outlook.
- S-REITs are yielding c.6% on average, or c.5.3% for large caps. Meanwhile, retail REITs are currently trading at a forward FY19F/20F yield of c.5.7% with a yield spread of c.3.5%, which is above the historical yield spread of c.3.2%.
- DPU growth for the sector is set to pick up to 2.4% CAGR over FY17/18 – FY19F/20F vs S-REITs’ average of 2.1% on the back of recent acquisitions and projections of positive rental reversions. This is mainly led by CapitaLand Mall Trust, whose DPU is projected to grow at c.3% CAGR following its Westgate acquisition and relaunch of Funan. Frasers Centrepoint Trust is also set to deliver stable DPU growth of c.1.5% p.a. but may surprise on the upside if an acquisition materialises.
Sector has done well, but still has legs to go as defensive picks play catch-up.
- Year-to-date, retail REITs (+6% in January) have lagged the more cyclical sectors of office REITs and hotel REITs, which were buoyed by risk-on sentiments at the turn of the year, jumping c.8% and c.10% respectively. However, our positive stance on the sector remains unchanged as its unique domestic factors and thus resilient yields - which we believe were key factors driving retail REITs’ consistent outperformance over 2H18, should continue to garner interest.
- Interestingly, we also saw a cycling of interest into overseas retail plays, which averaged 9.3% m-o-m (excluding Lippo Malls Indonesia Retail Trust (SGX:D5IU)), as the REITs continued to deliver impressive rental reversion numbers and attractive yields.
- For the remainder of 2019, we see retail REITs playing catch-up as concerns over easing macroeconomic tailwinds (as implied by the expected pause in rate hikes) filter through, driving higher rotational interest among investors into more defensive sectors.
- Retail Sector Picks: CapitaLand Mall Trust (SGX:C38U), CapitaLand Retail China Trust (SGX:AU8U), Frasers Centrepoint Trust (SGX:J69U), Mapletree North Asia Commercial Trust (SGX:RW0U), Mapletree Commercial Trust (SGX:N2IU).
Orchard rejuvenation story appears positive for incumbents, but several hurdles remain.
- Plans to enhance Orchard Road as a lifestyle destination were recently unveiled, prompting investors to search for potential beneficiaries. While we are generally positive on this move, which seeks to address fundamental issues threatening the long-term competitiveness of Orchard as a retail hub, it may be too soon to jump on the bandwagon given outstanding hurdles.
- For now, the ability (or lack thereof) to secure buy-ins from both public and private stakeholders, which has weighed on the effectiveness of previous campaigns, remains a key challenge.
Carmen TAY
DBS Group Research
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Derek TAN
DBS Research
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https://www.dbsvickers.com/
2019-02-18
SGX Stock
Analyst Report
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