Singapore Retail S-REITs - DBS Research 2021-02-02: Metro Mulls Exit From Department Store Business

SPH REIT (SGX:SK6U) FRASERS CENTREPOINT TRUST (SGX:J69U)

Singapore Retail S-REITs - Metro Mulls Exit From Department Store Business

Metro department store is considering potential closure given the weakening operating climate.
Not a total doomsday situation though for department store operators as they look to reinvent their offerings to attract footfall and sales.
Greater possible impact on SPH REIT (SGX:SK6U) given sizeable Metro presence there.
Frasers Centrepoint Trust (SGX:J69U)’s exposure to Metro further “de-risked” with contribution from former PGIM mall portfolio.

Metro department store (owned by Metro Holdings (SGX:M01)) is noted to be possibly mulling over the potential closure of its two existing outlets in Singapore, given the ever-changing retail scene and waning prospects for department stores. We understand that there are several years left on the lease at Causeway Point and at Paragon, where the department store stands as an anchor tenant, and the group may/may not extend those leases.
Metro is among one of the top 10 tenants by GRI for SPH REIT and Frasers Centrepoint Trust (less than 1.5% of total GRI), based on its latest annual report.

We had previously written about the ongoing pressures faced by department stores – see report: Singapore Retail REITs - DBS Research 2020-11-10: Survival of the fittest, given that this retail format had been struggling for years and failed to establish a meaningful omni-channel preference. Moreover, the lack of ability to hold atrium sales has put further pressure on their revenues.
While Robinsons was the first to go public about its closure, we note that there are still a handful of department store tenants that are battling the same pandemic pressure, with a good number owned by the S-REIT landlords/ REIT sponsors. These include:
Isetan (SGX:I15) –
- Isetan Scotts,
- Serangoon Nex,
- Tampines Mall, and
- Isetan Katong – Parkway Parade
BHG –
- Junction 8,
- Jurong Point,
- Lot One,
- Clementi Mall,
- Bugis Junction,
- Century Square, and
- upcoming One Assembly (JV With CapitaLand (SGX:C31))
Takashimaya –
- Ngee Ann City
Tangs –
- Tang Plaza,
- VivoCity
OG –
- Orchard Point,
- People’s Park,
- OG Albert

We note that many of these department stores had been tenants since the launch of their respective malls and most are not up to date in terms of refurbishments and store formats as compared to single-brand stores, which may have been a factor leading to a decline in appeal.
Raffles City will be unveiling a new concept department store in partnership with BHG under a new brand “One Assembly” within the space that was formerly occupied by Robinsons Singapore. The concept store will go big on digital payments (eCapitaVoucher, Hoolah and FavePay) and intends to participate in the eCapitaMall, CapitaLand’s digital mall, and will feature two spa cabins for shoppers to take a break. The new concept store will put a futuristic spin on our traditional department stores and will be vital, as department stores take a last lap of reimagination despite being late to the game. Will this new concept capture the eyes, hearts and wallets of consumers and carve out a new path of survival for other stores to follow?

BHG had been one of the earlier department stores to push out smaller retail formats with a specific niche through Welcia-BHG.
Welcia-BHG is a joint venture between AEON’s Welcia holdings and BHG and features a drugstore retail format similar to the likes of Watsons and Guardian. It specialises in an extensive range of Japanese beauty products that are competitively priced and has been consistently bringing in new Japanese brands. A search shows that its footprint overlaps with that of its department store counterpart in Singapore, including store fronts at Bugis Junction, Tiong Bahru Plaza and Northpoint.

Corresponding to this jump in trade sector classification from department stores to beauty and health, landlords would also be able to reap higher rents on smaller retail plots in comparison to rents on anchor space. We think that this can neutralise some of the rental pressure, should landlords be able to slice up anchor space to release as smaller retail plots. Demand and interest should stay high for these dominant malls and it is only going to be a matter of price.
Within the department store space, we still see tenants such as Daiso and Don Don Donki expanding during the pandemic year. Daiso has 25 stores in Singapore and will be opening its newest outlet at West Coast Plaza. A number of department store retailers such as Muji and Don Don Donki have also joined e-commerce platforms such as Lazada and Shopee. Better late than never!

Exposure appears to be material for Paragon Mall, a key asset for SPH REIT. Metro Department store has been at the mall for many years and in our view, occupies a “cold corner” within the mall where there is less traffic. We believe that having an anchor tenant to continue operating there is necessary to “pull” traffic.

While we understand that Metro is an anchor at Causeway Point, we see income risk being further minimised with the contribution from the PGIM portfolio. Given that Metro occupies a relatively desirable part of Causeway Point (levels 1 to 3) with good frontage, we believe that if Metro does exit the mall, a new anchor can be easily found.

Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-02-02

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.800 SAME 0.800

BUY MAINTAIN BUY 3.000 SAME 3.000