Singapore Retail REITs - DBS Research 2020-12-09: Defend & Conquer


Singapore Retail REITs - Defend & Conquer

Suburban retail maintains its lead in the recovery

Sales index stagnates at c.90% of pre-pandemic levels.

  • The retail sales index (ex-motor sales) declined 12.7% y-o-y in September. This represents a 4.2% m-o-m decline from August figures, primarily due to a high base last year that was boosted by strong sales in electronics. Total food & beverage sales declined 30% y-o-y in September, of which a significant 20% of total sales were derived from online orders. Broader retail sales stagnated at c.90% of pre-pandemic levels in the previous three months, which we see as a positive development given the lack of tourists in Singapore in 2020.

Suburban retail sales lead a recovery in retail sales.

E-commerce retreats from peak in May.

  • Approximately 11.2% of sales value was contributed by e-commerce in September which saw a prominent retreat since May during the Circuit Breaker peak, when it contributed 24.8% of total retail sales for the month. That said, there may be a reversal of trend as we near the year-end, with many shopping events such as Singles’ Day being primarily led by e-commerce.

Recovery unbalanced across trade sectors.

  • Recovery remains unbalanced across the various trade sectors as an estimated 70% of the total workforce are still working from home.
  • Consumer spending pattern has seen a drastic change since the start of the year. Expenditure within supermarkets & hypermarkets saw a sharp pick-up, which peaked in the Circuit Breaker month of April, at the expense of sales in all other trade categories.

Recent closures coincided with trade sectors that were the worst hit in terms of sales; supermarkets and housing goods outperformed.

  • For the month of September, food & alcohol (- 41% y-o-y), department stores (-40% y-o-y) and apparel & footwear (-28% y-o-y) sectors remain at a delay in terms of recovery. This coincides with closures within these trade sectors this year, including department store Isetan (SGX:I15) (Westgate) and various fashion labels such as Topshop and Brooks Brothers.
  • On the other hand, supermarkets & hypermarkets (+18% y-o-y) and furniture & household equipment (+11%) lead the recovery.

Consumption pattern may reverse course as early as year-end.

  • As the year-end nears, we believe that retailers will jump on the opportunity to launch sales and clear inventory to capture the pent-up demand amongst consumers. The fourth quarter is a seasonally strong quarter for consumer demand by a few folds. There is a time and event for consumers to open their wallets every month, with shopping events such as Black Friday (27 November) and Christmas (25 December) well lined-up during the course of the quarter.
  • The lack of travel and year-end holiday period could mean that families will be spending more locally. We see opportunities within the fashion & apparel (-28% y-o-y), electronics (-23% y-o-y), and food & beverage segments (-30% y-o-y).

Opportunities in 2021: “Lost sales” for retailers to capture

Watching for travel bubbles to key tourist source markets will boost spending.

  • Singapore welcomed 19m tourists in 2019, or a monthly average of 1.6m tourists. Since the effected border closures on 24 March, tourist arrivals have plummeted to a halt and averaged at c.4,800 arrivals per month between April and September, a steep 100% y-o-y decline.
  • A recovery of demand will likely see first light in 2021, as vaccine development and availability accelerates and travel bubbles gain more meaningful traction. We continue to track travel bubbles linked to key visitor source markets of China, Indonesia, Australia, India and Malaysia for both leisure and business travel demand that will supplement a more meaningful rebound in tourist arrivals.

Tourist receipts typically contribute c.one-fifth of total retail sales.

  • Based on 2019 figures, tourists spent a total S$27.7bn in Singapore, with airfare, business, medical & education (classified as others*), sightseeing, entertainment & gaming and accommodation & shopping (20% respectively), forming the main bulk of tourist receipts. That said, shopping, F&B and entertainment tourist receipts (which we estimate c.20% will be expensed at retail malls) will directly flow towards the retail index, or roughly one-fifth of total retail sales in 2019.
  • On a similar note, retail malls that derive significant footfall and sales from tourist will include central malls, airport malls and malls that are located near key tourism landmarks such as VivoCity. These malls typically garner 25-30% of their total tenant sales from tourists and will be the prime beneficiaries should travel bubbles and arrivals kick-start again next year.

Capturing the “lost opportunity” from Singaporeans who spend almost the same amount on shopping and travel.

  • Singaporeans spent a total of US$24.5bn on outbound expenditure in 2017, based on data from the World Tourism Organisation. That equates to c.72% of total retail sales value derived locally and far outweighs tourist retail expenditure in Singapore, which we estimate to make up c.22% of total retail sales derived in that year.
  • With local Singaporeans spending c.3.3x in travel as compared to tourist retail receipts, we have good reasons to believe that some of the travel savings this year and pent-up demand could be reflected in more domestic shopping instead.

“Dominant malls” to emerge stronger in a year of retailer consolidation

Many high-profile retailers shut doors in 2021.

  • Fashion is one of the trade categories that had been bearing the brunt of the pandemic, with slower-than-average recovery pace in comparison to the broader retail index. Notable retailers that have shut their operations in Singapore include department store operators such as Robinsons, with sales still at just 60% of normalised levels (September 2020).
  • Many others fall under the fashion and footwear categories such as Topshop and Esprit Group, with this category’s sales remaining at c.72% of normalised levels (in September 2020).

Retail groups that failed to establish a meaningful omnichannel presence were the first few to fold.

  • Two well-known British fashion groups, Arcadia Group and Debenhams are at the brink of collapse. Arcadia Group, which is the owner of brands such as Topshop and Dorothy Perkins, recently filed for insolvency proceedings, while department store owner Debenhams failed to seek a buyer while operating under administration since April this year. Both retail giants had longstanding problems in establishing a meaningful omnichannel retail presence as online players such as Boohoo and Asos grew their slice of the retail pie.
  • Arcadia has 466 stores under its operations, out of which 444 are within the UK. Within Singapore, some of their brands such as Miss Selfridge, Topman, and Topshop were previously represented by Wing Tai (SGX:W05). The last Topshop and Topman stores at Vivocity closed their doors in September this year. Arcadia’s brands are currently represented by only two Dorothy Perkins stores at Raffles City Shopping Centre and Plaza Singapura, and their impact on the Singapore market had been greatly reduced over the years from the chain closures.

Spotlight on local retail distributors.

  • The spotlight has been on the Dubai-based Al Futtaim group which owns the recently closed department store Robinsons. Robinsons’s last two shop fronts at Raffles City Shopping Centre and The Heeren had swiftly rolled out closing down sales after more than a decade of operations: Singapore Retail REITs - DBS Research 2020-11-02: Survival Of The Fittest.
  • Besides Al-Futtaim, Jay Gee Group and Wing Tai (SGX:W05) are also retail distributors that sit within the same peer group.
  • We further highlight the store exposure of brands held by the various local brand representatives, with Uniqlo and G2000 having the largest store exposure at 25 and 20 stores respectively. Based on data gathered through various online sources such as official brand websites and store directories, we note that approximately half of these store fronts are currently at malls owned by the S-REITs, while about 6-19% of the store fronts are currently situated in department stores such as Isetan and OG.

‘Survival of the fittest’.

  • Weaker brands and less popular retail formats were the first to crumble under the pandemic pressure. With a steep 62% y-o-y uptick in e-commerce in Singapore from 6.9% to 11.2% of total retail sales value in September 2020, adaptation from a pure brick-and-mortar presence was also key. From our understanding, Topshop continues to serve its Singapore fans through an online presence in partnership with Zalora, an alternative for brands that have exited from their physical locations.
  • Going into 2021, we expect further retailer consolidation and greater volatility in rents. Shop closures will likely be carefully reviewed on a store-by-store and brand-by-brand basis in order to maximise profitability.

When one door closes, another opens.

  • The closure of department stores in Singapore is widely viewed as a risk to retail landlords given their chunky retail plots and anchor tenant positions within the respective malls. Nonetheless, we see opportunities in this arena for luxury beauty booths owned by brands such as Chanel. They were previously represented by department stores and could venture out on their own to open physical store fronts. We see this as a net positive and believe that selected malls across the island that enjoy strong traffic and sales will benefit from the trend.
  • At the end of the day, retailers that view Singapore as a significant consumer market will protect their local market share and brand positioning. Chanel’s beauty retail outlet can now be found at one of the best frequented foot paths in Ion that was previously occupied by Kikki.K. We believe that the dominant malls across Singapore’s landscape can continue to capture demand from tenants and should remain resilient despite a year of continued retailer consolidations. Please see the following report for further details: Asian Insights SparX: Singapore F&B and Retail malls: The New Norm – Shopping and dining at your convenience.

Green shoots emerge within China Retail; riding on the momentum in 2021

China retail sales reversed decline trend in August.

  • China’s retail sales index turned positive for the first time this year in August 2020 as retail sales rose 0.5% y-o-y. This contrasts against a trough in January and February (both -20.5% y-o-y), which coincide with the pandemic peak in China where malls were primarily shut in accordance with provincial regulations and Chinese New Year holidays were extended to about 10 days.
  • Similarly, CapitaLand Retail China Trust (SGX:AU8U)’s malls observed directed closures or shorter operating hours during the period and have all since reopened from 2 April. Government support packages were directly channelled towards tenants in the form of preferential electricity tariffs, lower borrowing costs for business and tax subsidies.
  • September retail sales posted an even stronger growth of +3.3% y-o-y, providing confirmation that retail is kicking back with a vengeance.
  • CapitaLand Retail China Trust’s shopper traffic and tenant sales have recovered beyond pre-COVID levels. Similar to the broader retail sales trend, CapitaLand Retail China Trust’s shopper traffic and tenant sales had recovered to 103.4% and 102.1% of pre-COVID levels for the enlarged portfolio in August. A second lockdown in Beijing resulted in a kink in the recovery curve in June, which has eased since July. On the same-mall basis, traffic and sales have recovered to 76% and 78% of pre-COVID levels, with CapitaLand Retail China Trust’s portfolio reconstitution coming into play here. With green shoots emerging within the broader market, we continue to hold our belief that China will set the stage for a retail recovery globally.

Upward trajectory may likely continue towards year-end as the peak season approaches.

  • Retail sales grew 8.0% y-o-y in China last year, in comparison to an average 8.7% decline for 8M20, which may indicate further room for ‘normalisation’. Moreover, the fourth quarter will see a slew of shopping events that are historically spending peaks for the Chinese. These include the greatly popular Singles’ Day shopping event hosted by e-commerce giant Alibaba, which set a record of RMB 498bn in sales this year (+86% y-o-y), another yard stick showing strong consumer spending sentiments.
  • CapitaLand Retail China Trust (SGX:AU8U) – Portfolio shopper traffic and tenant sales had recovered to 103.4% and 102.1% of pre-COVID levels for the month of August. New Yuquan mall targeted for launch at year-end has achieved a solid 94% committed occupancy.
  • Sasseur REIT (SGX:CRPU) – Tenant sales had normalised to c.91% of pre-COVID levels in the latest reported quarter; seasonal uplift to further boost sales come next quarter.
  • Looking forward, following the ongoing recovery in the retail sales scene while international borders remain closed in the near term, we believe that China’s retail malls will continue to report strong operational metrics come 2021.

Revision in FY21 estimates

Retailers likely to take a ‘wait-and-see’ approach next year.

  • 2021 will likely be a year where retailers take a ‘wait-and-see’ approach and consider to either consolidate, restructure or ‘right-size’ leases. Any significant expansion will likely happen from 2022 onwards as retailers may pump in more capex in 2021 should the coming quarters look rosier. That said, well-anchored tenants that are generally resilient (in both suburban and central malls) may make use of the current circumstances to snap up and lock in prime retail plots amidst the higher turnover.

Sticking to dominant malls as always.

Uncertainty to persist as retailers consolidate in FY21.

  • We revise our operating metrics to take into account:
    1. Occupancy: 95% occupancy for FY20 to be extended to FY21, from the sector average of 96.6% as at end- September 2020
    2. Rental reversion: Broad-based negative 5% rental reversion assumed for FY21
    3. Rental rebates/waivers: Assumed to be marginal in FY21 given the extension in FY20. Most trade sectors assumed to be operational, including entertainment tenants, come Phase 3 of post-Circuit Breaker Measures, albeit at lower capacities.
  • The REITs currently report just a handful (less than 1 - 2% of total tenants) requesting for additional rebates.


Compelling valuations given a 13% DPU CAGR.

Maintaining Overweight as conservative estimates extend to FY21.

  • We remain positive on the retail sector given that
    1. retail sales continue to see a normalisation trend with an opportunity to capture greater domestic expenditure,
    2. vaccine development could further boost travel bubbles to welcome our first flock of tourists and benefit Orchard and central malls, and
    3. sector valuations remain broadly below 5-year mean with attractive forward yields attractive of 7.0%/7.4% for FY21/FY22 at current prices.
  • We extend our conservative estimates going into FY21 with expectations for occupancy to hover at c.95% (average occupancy at 97% as at 30 September 2020), and a -5% rental reversion for leases expiring next year.
  • Our top picks for Singapore retail REITs remain to be CapitaLand Integrated Commercial Trust (SGX:C38U), Frasers Centrepoint Trust (SGX:J69U) and Lendlease REIT (SGX:JYEU).

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2020-12-09
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