Singapore Retail REITs - DBS Research 2020-06-03: Poised For Recovery

Singapore Retail REITs - DBS Research | SGinvestors.io CAPITALAND RETAIL CHINA TRUST (SGX:AU8U) CAPITALAND MALL TRUST (SGX:C38U) FRASERS CENTREPOINT TRUST (SGX:J69U) LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU) MAPLETREE COMMERCIAL TRUST (SGX:N2IU)

Singapore Retail REITs - Poised For Recovery




Singapore Retail REITs - Market Feedback


Sector-wide decline in rents, led by fringe region retail spaces.

  • Rental Index across the central area, central region and fringe area fell 1.5%, 2.3% and 5.1% q-o-q respectively as the impact of COVID-19 took a toll on leases expiring in the past quarter.
  • Among the listed landlords, occupancy saw a similar sector wide dip of 60bps since 4Q19. Rental reversions however, held up relatively well with a positive mid-single-digit average reversion clocked for 1Q20.

Low future supply of prime retail malls.

  • Approximately 18,100 sqm of retail spaces were completed in 1Q20, or 30% of total retail pipeline for the year, adding to downtown and suburban retail stock. We continue to take comfort in the low retail supply in 2020 and 2021, which will help cushion a hike in vacancy rates islandwide.

Central retail malls impacted by lower tourist and office worker traffic.

  • Retail malls located within the central region were observed to be feeling the brunt from COVID-19 to a greater extent than suburban malls due to the absence of the usual nd office crowd. Tourist arrivals to Singapore in March suffered an 85% y-o-y decline as global travel experienced a cliff drop from border closures and lockdown measures. This was accompanied by the nation’s two-month Circuit Breaker, which mandated office workers within the non-essential trades to work from home.


What are we are watching?


Income retention in 2Q20.

  • Selected retail REITs retained 50-80% stributable income in 1Q20, which we estimate will sufficiently tide through operational and interest obligations for the quarter. We anticipate further income retention in 2Q20 by most of the landlords in anticipation of two new COVID-19 bills to be tabled in June to allow tenants to defer rental obligations and mandate landlords to grant rental waivers of up to two months to qualifying SME tenants.

Phased in reopening of retail malls.

  • Retail malls and tenants st trade categories (estimated to be c.90-95%) will be given the green light to resume business during phase 2 of post-Circuit Breaker measures, which was announced to be within the first week of July. There is a possibility of an earlier-than-anticipated reopening by mid-June, subject to the pandemic situation remaining stable, which will bode well for both retail landlords and tenants.

Risk of tenant defaults and rent deferrals.

  • While we understand test quarter updates that the risk of tenant defaults is low, limited to a handful within the REIT space, this figure may trend up in the coming quarter. We await the fine prints of the COVID-19 bill, which will be tabled in June, to understand the impact of rent deferral on cash flows for the rest of the year.
  • Nonetheless, government cash grants and further mandatory rent waivers for qualifying SME tenants should help to suppress the trend of tenant defaults.


Singapore Retail REITs - Key Observations & Drivers of DPU in 1Q20


CapitaLand Retail China Trust (SGX:AU8U)


CapitaLand Mall Trust (SGX:C38U)


Frasers Centrepoint Trust (SGX:J69U)


Lendlease Global Commercial REIT (SGX:JYEU)


Mapletree Commercial Trust (SGX:N2IU)


Mapletree North Asia Commercial Trust (SGX:RW0U)


SPH REIT (SGX:SK6U)


Sasseur REIT (SGX:CRPU)



Valuations


Current trading yields worth accumulating.

  • The retail REITs are currently trading at an average P/NAV of 0.9x, between -1 standard deviation (SD) and -2 SD levels on historical 5-year range. Frasers Centrepoint Trust and Mapletree Commercial Trust are currently trading above average mean at 0.96x and 1.12x P/NAV respectively. Share price resilience stems from Frasers Centrepoint Trust’s full exposure within the suburban retail mall space, which we anticipate to lead recovery once malls reopen, and Mapletree Commercial Trust’s 60% exposure to business park and offices, which is relatively sheltered from the impact of the pandemic.
  • REITs with exposure to central retail malls (CapitaLand Mall Trust, SPH REIT and Lendlease Global Commercial REIT) will likely lag in footfall recovery in office worker shopper flow while tourist traffic is unlikely to see normalisation in the immediate-to-short term.

Low gearing and acquisition opportunities likely delayed to beyond FY20.

  • The subsector’s average gearing of 34.4% stands as the lowest within the sector, which average at 36.4%. Inorganic growth opportunities are unlikely to be reflected in currently valuation levels as opportunities will likely be delayed to 2H20 and beyond to ensure yield accretion. We have not assumed additional acquisitions at our current target price for the sector.

See PDF report attached below for more details.






Singapore Research DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-06-03
SGX Stock Analyst Report BUY MAINTAIN BUY 1.550 SAME 1.550
BUY MAINTAIN BUY 2.150 SAME 2.150
BUY MAINTAIN BUY 2.650 SAME 2.650
BUY MAINTAIN BUY 0.89 SAME 0.89
BUY MAINTAIN BUY 2.250 SAME 2.250



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