Singapore Retail REITs - DBS Research 2021-02-18: Where To Shop In Orchard? Picking The Most Fruitful “Orchard Road” Play


Singapore Retail REITs - Where To Shop In Orchard? Picking The Most Fruitful “Orchard Road” Play

Where are shoppers returning to in Orchard Road?

Footfall and tenant sales are still feeling the COVID fever.

  • Dubbed as a shopping paradise, Orchard malls were the first few to be hit by the pandemic when the nation closed its borders, causing tourist footfall to trickle to a halt. Shopper footfall plunged to a low of 20% of normalised levels during the Circuit Breaker period. Almost one year in, the aftermath of a COVID fever still reverberates with the Orchard malls, albeit to a lesser extent, in terms of shopper traffic and tenant sales that are currently still hovering below pre-COVID levels.
  • Will tourists return in 2021? Tourists typically contribute ~20% of central Orchard malls’ sales and their numbers remain primarily lacklustre. Broader optimism on the reopening of domestic borders have soured with recent developments. Countries with large domestic travel components such as Japan and Europe saw a sharp spike in COVID cases, prompting Singapore to temporarily suspend the reciprocal green lanes (RGL) with South Korea, Malaysia and Germany for three months. This latest suspension comes on the back of the suspension of RGL with Indonesia and Japan in December.

Corporate visitors likely to precede leisure travellers.

  • Locally, Singapore started its vaccination programme in December 2020 and is aiming to inoculate the entire population by 3Q21. Should there be no further hiccups in the return of RGL arrangements and vaccination progress, the market expects MICE events to return in 2H21. These include the World Economic Forum which is scheduled to take place in Aug this year (albeit being postponed from May 2021). This will set the tone for future international MICE events to follow suit and benefit malls within the central precinct of Singapore, including our Orchard malls.

Greater upside for F&B, luxury, health & beauty and IT & electronics segments.

  • While q-o-q normalisation had been on a steady rise, shopper traffic data reported in 4Q20 remained within a range of -50% to -37% of normalised levels, while tenant sales hovered within -25% to -33% of normalised levels.
  • We see greater upside potential relative to downside risks for trade sectors including food & beverage, luxury, health & beauty and IT & electronics, in descending order of preference.
  • Trade sector data in the latest months shows that the F&B segment is seeing strong normalisation in this period of festivities as Singaporeans venture out to wine and dine. F&B retail sales growth improved from -23% y-o-y in November to -17% y-o-y in December. We see greater catalysts for F&B given the increased table capacity from five to eight people since the commencement of Phase 3 measures, which should support demand for group dining going into the Chinese New Year and hopefully, beyond.
  • The luxury segment was also noticeably strong in comparison to other trade sectors, suggesting strong pent-up demand and increased retail appetite among the locals given the lack of travel. See our previous report: Singapore Retail REITs - DBS Research 2020-12-09: Defend & Conquer.
  • Based on tenant trade exposure and earnings buffer, we prefer Lendlease REIT (SGX:JYEU) and Starhill Global REIT (SGX:P40U) to SPH REIT (SGX:SK6U) due to limited downside risks to Starhill Global REIT’s 43% master lease exposure and Lendlease REIT’s 39% exposure to the F&B segment.

Earnings visibility and downside risks

Stability from Toshin master lease at Ngee Ann City and office / medical component at Paragon.

  • Of the 255k sqft of retail space owned by Starhill Global REIT at Ngee Ann City, approximately 89% is master leased to Toshin. The Toshin master lease contributes ~43% of Starhill Global REIT’s total retail exposure in Singapore and 22% of Starhill Global REIT’s overall portfolio. The current master lease structure in place ensures stability to the REIT as the next rental review (every three years) will only be in mid-2022. This would allow Starhill Global REIT to sharpen its focus on Wisma Atria amidst the current headwinds and provide earnings stability to the REIT.
  • Paragon consists largely of retail NLA that contributes ~69% of the asset’s total NLA, while the remaining non-retail NLA (comprising medical suites/offices at Paragon Medical) delivers relatively more stable earnings. The medical/office component at Paragon contributes ~19% of Paragon mall’s and ~12% of SPH REIT’s enlarged portfolio by gross rental income.

Potential exit of Paragon’s anchor tenant – Metro.

  • Metro (SGX:M01) announced that it is mulling over the potential closure of its existing two outlets in Singapore shortly after that of Robinsons (see our report: Singapore Retail S-REITs - DBS Research 2021-02-02: Metro Mulls Exit From Department Store Business). The trade sector had suffered one of the steepest drops in sales this year at -28.7% y-o-y (December 2020). One of its two outlets is at Paragon where it stands as the anchor tenant. We understand that there are several years left on the lease and the group might or might not extend those leases.
  • Metro is one of the top 10 tenants by GRI for SPH REIT as the department store contributes ~9% to the mall’s gross rental income. Metro has been at the mall for many years and in our view, occupy a “cold corner” within the mall where there is less traffic. This might constitute downside risk to earnings should the tenancy not be renewed.

Repositioning amidst higher tenant turnover.

  • Leasing momentum was robust for the period given the high tenant turnover and lower market rental rates. 313@Somerset saw the addition of several F&B and fashion tenants that complement the mall’s current offerings. New tenants such as By Invite Only and Sunday Staples are up-and-coming local brands that have a strong omnichannel within the Singapore market, and earnings resilience by virtue of their high percentage of online revenue.

Sizing up against neighbouring giants.

  • The excellent connectivity at Wisma Atria has been losing steam in terms of its high-end positioning in comparison to neighbours Ion Mall and Nge Ann City. Instead, Starhill Global REIT is looking to reposition Wisma Atria as a premier lifestyle mall, with a specific focus on strengthening its food & beverage offerings.
  • Hotpot giant HaiDiLao and beverage brand Yanmi Yoghurt are among the new tenants at Wisma Atria. We think that the mall will stand out better by focusing on mid-priced F&B tenants. This enables Wisma Atria to better differentiate itself against neighbouring malls which are all well-positioned within the luxury space.

Operating Metrics and Implied Valuation

In good financial health.

  • On a balance sheet perspective, all three REITs (Lendlease REIT, Starhill Global REIT and SPH REIT)are at a comfortable gearing range of 30-36%, despite downward pressure on retail valuations in 2020. In the latest round of revaluation, value appreciation of the Orchard malls was in the range of +0.5% (313@Somerset) to - 4.6% (Wisma Atria) y-o-y.

SPH REIT has the highest acquisition potential.

  • In terms of gearing and visible ROFR pipeline, we see the highest acquisition potential for SPH REIT, subjected to the capital-raising environment. SPH REIT may look to diversify exposure away from Paragon and acquire more resilient suburban retail assets such as Seletar Mall or the upcoming Woodleigh Mall. Woodleigh mall is positioned as a dominant retail mall within a mixed development project in the underserved Bidadari precinct. The mall is currently under construction and could come under consideration only five years later, i.e. after the first leasing cycle.

Implied valuation the highest for Paragon.

  • The current share price performance of the three REITs implies a valuation of S$1,096m, S$1,482m and S$2,737m for 313@Somerset, Wisma Atria & Ngee Ann City and Paragon mall respectively.
  • On a price psf basis, SPH REIT and Starhill Global REIT look to be at a discount by virtue of their office and medical NLA which we estimate to be valued lower at ~S$2,400 psf based on Orchard office rent rates in comparison to Orchard retail space.
  • Wisma Atria and Ngee Ann City have a shorter lease term of 40/51 years remaining in comparison to 313@Somerset (84 years) and Paragon (91 years). This was a factor that caused Starhill Global REIT to trade at a P/NAV discount relative to peers. Based on our calculations, retail price is estimated at S$2,382 psf and S$4,450 psf for Starhill Global REIT and SPH REIT respectively if we strip out the non-retail component. On a relative basis, SPH REIT’s current trading level looks to be closer to the market value of the asset, with a faster pace of recovery priced in as compared to both Lendlease REIT and Starhill Global REIT.


  • Starhill Global REIT is a laggard on three fronts – share price performance, P/NAV and dividend yield.

Share price performance.


  • On a P/NAV basis, all three Orchard plays are trading below the sector average of 0.97x, and below book at
  • Both Starhill Global REIT and SPH REIT are trading within the range of -1 and -2 SD of historical range. We note that the comparably lower P/NAV for Starhill Global REIT factors in the shorter remaining lease term for Wisma Atria (40 years) and Ngee Ann City (51 years) in comparison to Paragon (91 years) and 313@Somerset (84 years).

Dividend yield.

Top pick Lendlease REIT; prefer Starhill Global REIT over SPH REIT.

  • We remain overweight on Lendlease REIT as our top Orchard pick (Target price S$0.90) and prefer Starhill Global REIT (Target price S$0.55) over SPH REIT (Target price S$0.80) for an Orchard recovery play.
  • Lendlease REIT is well-placed as our top Orchard pick given its
    1. 39% exposure to the F&B sector where we see immediate upside to normalisation,
    2. future-positioned mall with a continuous effort to scale its omnichannel share a step ahead of Starhill Global REIT and SPH REIT,
    3. ~30% stable revenue contribution from office asset Sky Complex, and
    4. forward yield of ~6.6% that is attractive on a risk-to-reward perspective.
  • We expect near-term share price normalisation for Starhill Global REIT to trade closer to mean, supported by earnings visibility through a 50% revenue contribution from master lease and anchor leases.
  • See report attached below for complete data comparison and analysis.

Read also:

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-02-18
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.550 SAME 0.550