Retail REITs - OCBC Investment 2019-03-12: Firm Pre-Commitment Levels To Mitigate Upcoming Supply Pressures

FRASERS CENTREPOINT TRUST (SGX:J69U)

Retail REITs - Firm Pre-Commitment Levels To Mitigate Upcoming Supply Pressures

After registering negative q-o-q growth for the past two quarters, Singapore’s URA retail rental index turned around in 4Q18. URA statistics indicate that the overall retail rental index enjoyed a firm growth of 1.2% for the Central Region, which was the strongest increase since 3Q13 (+1.3% q-o-q). This can be further broken down into a 0.3% increase for the Central Area and +3.5% for the Fringe Area.
On the other hand, CBRE data reflected a more steady performance. Retail rents for the City Hall/Marina Centre sub-market rose 0.2% q-o-q to S$22.15 psf/month; rents for Other City/City Fringe sub-market declined marginally by 0.3% q-o-q to S$17.10 psf/month; while there were no changes to the Orchard Road and Suburban sub-markets.
Separately, Colliers highlighted in a recent report that ground-floor rents in Orchard Road and Regional Centres grew 1.4% and 0.4% y-o-y to S$41.20 psf/month and S$33.60 psf/month, respectively, as at end- 2018. Looking ahead, Colliers has projected ground-floor rents in Orchard to continue its recovery, at +0.8% in 2019. From 2018-2023, average annual rental growth is projected to increase at 1.0% to reach S$43.20 psf/month by end-2023.

Earlier last month in his Budget 2019 speech, Finance Minister Mr. Heng Swee Keat revealed a one-off S$1.1b Bicentennial Bonus that grants up to S$300 in GST voucher-cash and will benefit 1.4m residents. This is about twice the amount allocated for SG Bonus last year, and will help to boost consumption and retail spending. Mr. Heng supplemented this with a personal income tax rebate and an additional year of service and conservancy charges rebate for HDB households.
The GST rate hike from 7% to 9% was once again put on hold this year as the government announced that it would monitor prevailing economic conditions to increase rates at the right time.

Singapore’s retail sales excluding motor vehicles ended the year on a gloomy note, dropping 3.0% y-o-y and 4.1% q-o-q, respectively, in Dec 2018, based on data from the Department of Statistics Singapore. This reflected weak consumer sentiment with most segments registering negative y-o-y sales growth.
Excluding motor vehicles, Computer & Telecommunications Equipment was the worst performer (-16.8%), followed by Recreational Goods (-5.8%), Watches and Jewellery (-5.7%) and Furniture and Household Equipment (-3.9%). Online retail sales made up an estimated 5.5% of total retail sales in Dec, versus 6.6% the previous month.
For the full-year, total retail sales in 2018 fell -0.7% but if we exclude motor vehicle sales, retail turnover was actually up 1.1% as compared to 2017.

According to CBRE, 1.10m sq ft of retail space is expected to emerge in 2019, versus an estimated 1.24m sq ft of retail inventory which entered the market in 2018. This strong supply inflow is not expected to be a major concern, in our view, because an encouraging amount of the space has been taken up at high pre-commitment rates. For example, Funan’s retail component has already seen a pre-commitment rate of ~80%.
During Lendlease Group’s recent earnings call for its 2QFY19 results on 24 Feb, management highlighted that 78% of Paya Lebar Quarter retail mall has been pre-committed. Collectively, these two projects form 665k sq ft, or ~61% of 2019’s supply. Taken individually, the remaining upcoming projects will each contribute less than 90k sq ft of space.
Beyond 2019, the pipeline of new retail space will drop considerably to 135.5k and 98.0k sq ft in 2020 and 2021, respectively. This compares very favourably to the historical five-year annual average of 1.66m sq ft from 2014 to 2018. We expect tightening vacancy in the medium term due to incoming supply scarcity.

On 30 Jan this year, STB, URA and NParks jointly announced plans to enhance Orchard Road as a lifestyle destination. Innovative retail concepts, attractions, entertainment and events will be introduced, while elevated link bridges will help to improve accessibility.
We expect the government’s concrete plans to improve the longer-term viability of Orchard Road to be supportive of asset values in the precinct. Within this aspect, STARHILL GLOBAL REIT (SGX:P40U), SPH REIT (SGX:SK6U) and OUE HOSPITALITY TRUST (SGX:SK7) would be clear beneficiaries.

Looking across the performance of the retail REITs with significant local exposure and based on disclosures available, we note that with the exception of OUE HOSPITALITY TRUST’s Mandarin Gallery property, all the other retail REITs continued to deliver positive rental reversions for 4QCY18, with SPH REIT, MAPLETREE COMMERCIAL TRUST (SGX:N2IU) and FRASERS CENTREPOINT TRUST (SGX:J69U) recording stronger growth.
SPH REIT delivered the firmest rental uplift, with positive rental reversions of 9.7%, a reversal from the -3.5% registered in its previous quarter. This was due to strong performance from all its local assets: Paragon (+10.1%), Clementi Mall (+4.5%) and its newly acquired Rail Mall (+7.9%). Occupancy rates were generally higher q-o-q, with most above 96%. Overall, shopper traffic increased although tenant sales were less vibrant.

On 28 Feb, FRASERS CENTREPOINT TRUST (SGX:J69U) announced that it has entered into conditional sale and purchase agreements to acquire a 17.1% interest in PGIM Real Estate AsiaRetail Fund Limited (PGIM REAF). This is the largest non-listed retail mall fund in Singapore, and the fund portfolio includes six retail malls in Singapore, namely Tiong Bahru Plaza, White Sands, Liang Court, Hougang Mall, Century Square and Tampines 1. The total acquisition consideration is estimated to be ~S$342.5m, versus the net asset value of S$341.7m of PGIM REAF, as at 31 Dec 2018.
We believe this transaction complements FRASERS CENTREPOINT TRUST’s existing portfolio of suburban malls and is expected to be DPU accretive. On a pro forma basis, FRASERS CENTREPOINT TRUST highlighted that its FY18 DPU would improve by 0.3%, 1.9% and 3.6%, based on LTV assumptions of 60%, 80% and 100%, respectively.

Wong Teck Ching Andy CFA OCBC Investment Research | Deborah Ong OCBC Investment | Joseph Ng OCBC Investment | https://www.iocbc.com/ 2019-03-12

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