Singapore Retail REITs - UOB Kay Hian 2019-06-21: Turning Around; Benefitting From Regional Economic Gateways

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MAPLETREE COMMERCIAL TRUST (SGX:N2IU) FRASERS CENTREPOINT TRUST (SGX:J69U) CAPITALAND MALL TRUST (SGX:C38U)

Singapore Retail REITs - Turning Around; Benefitting From Regional Economic Gateways

• Retail REITs were largely ignored in the past. However, new data shows that penetration for online shopping at 5.4% is not as pervasive as feared. Increasing contribution from tourists has also taken up the slack.
• BUY Frasers Centrepoint Trust (Target Price: S$2.72) and Mapletree Commercial Trust (Target Price: S$2.22).
• Frasers Centrepoint Trust focuses on suburban retail malls and benefits from the development of Northern Gateway.
• Mapletree Commercial Trust is a play on the develop tourism attractions at Sentosa and Pulau Brani.
• Maintain OVERWEIGHT.

RENTS AND CAPITAL VALUES HAVE BOTTOMED SINCE 1H17

Retail rents have bottomed and gradually turned around.

• The rental market corrected in 2015 and 2016 but has bottomed since 1H17. In aggregate, rents for Orchard Road declined 6.9%, compared with the smaller 3.1% for suburban malls during the two years. Rents for Orchard Road and suburban malls edged higher by 1.3% and 1.2% respectively to S$31.70psf and S$29.15psf in 2018.

Capital values have stabilised.

• Capital values for prime Orchard Road strata retail space corrected 6.9% in 2015 and 2016 but have stabilised at S$6,700psf since 2017.

RESUMES POSITIVE RENTAL REVERSION

• Retail REITs have recently registered higher positive rental reversion, in tandem with the gradual recovery in spot retail rents.
• CAPITALAND MALL TRUST (SGX:C38U): Rental reversion eased to 0.7% in 2018 but picked up slightly to 1.2% in 1Q19.
• FRASERS CENTREPOINT TRUST (SGX:J69U): Rental reversion eased to 3.2% in FY9/18 but picked up to 5.4% in 1HFY9/19.
• MAPLETREE COMMERCIAL TRUST (SGX:N2IU)’s VivoCity:
  1. VivoCity achieved strong double-digit rental reversion in FY12 (24.9%), FY13 (33.1%) and FY14 (37.6%) after the opening of Resorts World Sentosa in Jan 10 and Universal Studios Singapore in Mar 10.
  2. Rental reversion eased to 1.5% in FY18 but picked up to 3.5% in FY19.

TOURISTS CONTRIBUTING TO A LARGER SHARE OF RETAIL SPENDING

Boost from rising tourist arrivals.

• Visitor arrivals hit 17.4m in 2017 (+6.2%) and expanded further to reach an all-time high of 18.5m in 2018 (+6.2%). However, visitor arrivals slowed to 1% y-o-y in 1Q19. Visitors from China grew 3% y-o-y but visitors from Indonesia declined 3% y-o-y. In Apr 19, visitor arrivals rebounded to 3.4% y-o-y.
• The moderation in growth of visitor arrivals was due to a confluence of factors:
  1. lack of major events;
  2. elections in regional countries, such as India, Indonesia and Thailand; and
  3. cautiousness caused by escalation in the trade conflict between the US and China.

Growing contributions from tourists.

• Tourists accounted for an increasing share of retail sales excluding motor vehicles. We estimate that their contributions have expanded from 16.7% in 2000 to 21.5% in 2019 (peak: 23.6% in 2016). Visitor arrivals have been growing faster than population growth. For the past 10 years, visitor arrivals have expanded at CAGR of 6.2%, compared with population growth of 1.5%.
• Similarly, tourists’ expenditures on shopping and F&B have grown at a 10-year CAGR of 3.4% and 3.1% respectively, which is faster than the 1.4% for retail sales excluding motor vehicles. Thus, tourists are becoming a bigger driver of retail sales relative to domestic consumption.

FADING IMPACT FROM ONLINE SHOPPING

Threat from online shopping less formidable than initially thought.

• According to the Department of Statistics, online retail sales accounted for 5.4% of total retail sales excluding motor vehicles in Apr 19, a pullback compared with the peak of 6.6% in Nov 18. We recognised that there is a seasonal pattern in online shopping and the figure for Apr 19 remains 1.0ppt higher on a y-o-y basis.
• However, we argue that the penetration of online shopping is near saturation. Retail malls in Singapore have also adapted by allocating more retail space to F&B outlets.

Cannibalisation from online shopping starting to ease.

• We argue that penetration of online retail sales could become saturated fairly soon:

Online shopping is nothing new.

• Amazon was launched way back in 1994 and Alibaba’s Taobao in 2003. More localised online retailers RedMart, Lazada and Carousell were launched in 2011, 2012 and 2013 respectively.

Retail malls support Singaporeans’ strong food culture.

• Consumers do spend a fair amount of time in retail malls in land-scarce Singapore. 53.8% of all married couples in Singapore are dual-income couples who typically do not cook at home. They are likely to have dinners or pack takeaway food at restaurants or food courts after work. Our mall-centric lifestyle is aided by retail malls’ close proximity to MRT stations.
• We observed that the proportion of retail space devoted to F&B has expanded by 3.6ppt, 3.8ppt and 3.4ppt respectively to 31.3% for CapitaLand Mall Trust, 32.2% for Frasers Centrepoint Trust and 31.3% for Mapletree Commercial Trust’s VivoCity.
• Our study based on Frasers Centrepoint Trust indicates that average passing rent for F&B remained stable at S$16.13psf pm in 1HFY19 (FY13: S$17.29psf pm) despite more retail space being allocated to F&B.

Unhealthy to spend too much time online.

• According to the AIA Healthy Living Index Survey, Singaporeans spend an average of 3.7 hours online per day for non-work usage, compared with an average of three hours for regional countries. Prolonged time spent online affects our posture, causes lack of sleep and prevents us from getting adequate exercise. Going to the mall for a short walk is a healthier alternative.

Moving from online to offline.

• Online retailers have begun to adopt an omni-channel approach. Some online retailers have even used physical stores as fulfilment centres for online sales. Brick-and-mortar retailers retain the advantage of allowing consumers to view and try out physical products before purchase.

MUTED FORWARD SUPPLY BEYOND 2019

Large supply in 2019 already taken up.

• 1.03m sf of retail space, which is equivalent to 2.1% of total private retail stock, will come on stream in 2019. Of these, Funan’s retail NLA of 325,000sf is 92% pre-committed while Paya Lebar Quarter Mall’s retail NLA of 340,000sf is more than 50% pre-committed (anchor tenants: Fairprice Finest, Kopitiam and Shaw Theatres). Tekka Place (redevelopment of The Verge) is slated to open by end-19, and half of its 70,000 sf NLA retail space has been committed.
• Smaller-scale projects include asset enhancement initiatives (AEI) on China Square Central (46,258 sf) and Raffles Hotel (133,526sf).

Supply tapering off in 2020-21.

• Future supply is expected to drop significantly by 83% to 0.17m sf in 2020 and 0.1m sf in 2021. Northshore Plaza I (66,602sf), Chevron House retail podium (38,427sf) and Centrium Square (27,179sf) are scheduled to be completed in 2020. Le Quest (41,333sf), Boulevard 88 (32,000sf) and Changi Gardens Home (24,703sf) are expected to be completed in 2021.

Future supply significantly below historical supply.

• Annual average supply of 0.21m sf is expected for 2020-22 (0.62m sf over three years), which is significantly below the 5-year historical average of 1.01m sf from 2014 to 2018. According to CBRE, Downtown Core (34.0%), Outside Central Region (31.9%) and Fringe Area (28%) accounted for the bulk of future supply by sub-market. On the other hand, Orchard Road accounted for only 1.9% of future supply.

KEY RECOMMENDATIONS

Retail REITs are defensive anchors.

• The external environment has become highly uncertain due to potential escalation of trade conflict between the US and China. Thus, we seek shelter in defensive retail REITs:

CAPITALAND MALL TRUST (SGX:C38U) (Rating: HOLD; Target Price: S$2.65)

• Suburban malls in HDB housing estates account for 53% of CapitaLand Mall Trust’s portfolio valuation.
• Three retail malls − IMM Building, JCube and Westgate, which account for 20% of CapitaLand Mall Trust’s portfolio valuation − are located within Jurong Gateway. The government intends to develop Jurong Gateway into Singapore’s second CBD.
• Funan was designed to integrate online and offline shopping and is scheduled to open in Jun 19. We estimate Funan to contribute rental income of S$16.5m in 3Q19, representing 8% of total gross revenue.
• See report: CapitaLand Mall Trust - Beneficiary Of Jurong Lake District; Funan Coming On Stream In Jun 19.

FRASERS CENTREPOINT TRUST (SGX:J69U) (Rating: BUY; Target Price: S$2.72)

• Frasers Centrepoint Trust focuses on suburban retail malls and necessity spending. Richard Ng will take over as CEO with effect from 1 Jul 19.
• Causeway Point, which accounted for 47% of Frasers Centrepoint Trust’s NPI in 2QFY19, benefits from the development of Northern Gateway, Woodlands Regional Centre and the new Thomson- East Coast Line.
• The acquisition of a 33.3% stake in Waterway Point and 18.8% stake in PGIM Real Estate Asia Retail Fund adds depth to Frasers Centrepoint Trust’s specialisation in suburban retail malls.
• See report: Frasers Centrepoint Trust - Beneficiary Of Northern Gateway, Adding Depth To Suburban Retail.

MAPLETREE COMMERCIAL TRUST (SGX:N2IU) (Rating: BUY; Target Price: S$2.22)

• Mapletree Commercial Trust is the prime beneficiary of rejuvenation of Sentosa and Pulau Brani due to the concentration of its properties at the HabourFront area.
• VivoCity benefits from regular AEIs, growing tourist arrivals and the upcoming residential enclave at GSW.
• Mapletree Business City 1, which accounted for 30% of NPI in FY19, enjoys built-in rental escalation of 2-3% per year.
• See initiation report: Mapletree Commercial Trust - Prime Beneficiary Of Rejuvenation Of Sentosa & Pulau Brani.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-06-21

SGX Stock Analyst Report BUY MAINTAIN BUY 2.220 SAME 2.220

BUY MAINTAIN BUY 2.720 SAME 2.720

HOLD MAINTAIN HOLD 2.650 SAME 2.650