Singapore REITs - CGS-CIMB Research 2021-03-03: Trending Towards A Full Recovery


Singapore REITs - Trending Towards A Full Recovery

  • Pent-up demand boosted Singapore REITs’ tenant sales in 4Q20. Occupancy remained high, but rental reversions slipped into negative territory.
  • Expect continuous improvement in footfall to support tenant sales. Rental reversion pressure is inevitable given the weaker trading environment.
  • Top pick remains Frasers Centrepoint Trust (SGX:J69U) as we expect it to recover faster than its peers.

Occupancy remained high, but rental reversion weakened

  • Despite COVID-19, the occupancy of malls under the REITs generally remained high at > 95% and improved q-o-q in 4Q20. While occupancy rate was still lower y-o-y, the q-o-q improvement was encouraging despite the much reduced rental assistance in 4Q20 (vs. 2Q-3Q20), as malls that were well managed and strategically located continued to see high demand.
  • While no numbers were provided, we understand that 4Q20 rental reversions were in the negative range, except for Frasers Centrepoint Trust, which saw relatively flat reversions — impressive but not unexpected, given Frasers Centrepoint Trust’s lower reliance on tourist spending and the fact that ~45% of its tenants are from essential services. The malls in northern Singapore generally performed better — Frasers Centrepoint Trust’s malls (43% of Frasers Centrepoint Trust’s assets by value in 1QFY21 are located at the north and northeast of Singapore) saw a faster pick-up in tenant sales, while CapitaLand Integrated Commercial Trust’s malls in north Singapore also did relatively well — due to, we believe, the lower mall penetration rate in the north (outer north and outer northeast rate of 2.09 and 2.32 sf per capita, respectively, vs national average of 6.5 sf per capita).
  • While landlords are generally more flexible in leasing terms now, we understand that short-term leases and GTO rent structures are still a small portion of total rental income. Although first-year rental may have a larger portion of GTO, this is usually compensated with annual rental step-ups in the later stage of the lease.
  • Going forward, we believe the leasing environment, while improving, will remain challenging even for Frasers Centrepoint Trust as tenants evaluate their budget and performance on a group-wide basis. As of now, we understand that tenants are still adopting a wait-and-see approach and new brand tenants are harder to come by due to border closures.
  • While we think that the REITs will be able to maintain high occupancy at the malls, we believe that rental pressure will be inevitable given the weak trading environment. We have factored in a full-year -3% to -20% rental reversion for FY21 in our forecasts.
  • Frasers Centrepoint Trust and SPH REIT have the largest portion of lease expiries in FY21.
    • Frasers Centrepoint Trust has renewed 25% of the expiries due in FY21, and 29% of the leases remain to be renewed by end-FY21. Fortunately, we understand that most of these tenants are doing satisfactorily.
    • As for SPH REIT, we believe it will not have issues renewing/backfilling potential vacancies given the strategic location of Paragon, but this is likely to be achieved at the expense of rental reversion. We are less concerned about its malls in Australia as tenant sales have almost recovered to the previous year’s 2019 level.
  • CapitaLand Integrated Commercial Trust, Lendlease REIT, Mapletree Commercial Trust and Starhill Global REIT have lower retail renewals in FY21/22 on a portfolio basis, given their exposure to office assets.

Tenant sales and footfall improved qoq, but footfall recovery lagged behind tenant sales

  • In line with the recovery in retail sales in Singapore, the REITs’ tenant sales continued to improve on a q-o-q basis. Generally, suburban malls’ tenant sales in 4Q20 were almost at parity (-10% to +10%) with the previous year’s level, while downtown malls saw slower recovery at 70% to 85% of 4Q19’s level. While downtown malls’ recovery was slower, we think this is encouraging as tourists generally make up ~30% of the total spending in a downtown mall. The festive period and inability to travel had helped to boost tenant sales, which would have been even higher if not for the limited promotional activities due to safe distancing measures.
  • Given the greater impact of COVID-19 on downtown malls vs suburban malls, Frasers Centrepoint Trust saw the fastest recovery in tenant sales in 4Q20 (-1.8% to +1.5% y-o-y). This is followed by CapitaLand Integrated Commercial Trust, which has a ~50% exposure to suburban malls, at -5.5% y-o-y, Suntec City Mall at -12% y-o-y, VivoCity (owned by Mapletree Commercial Trust) at -14%, SPH REIT’s Singapore business (which includes Paragon in Orchard Road) at -29% to -11%, and Lendlease REIT’s 313 and Starhill Global REIT’s Wisma Atria at ~70% of 2H19’s level. Malls at Orchard Road were affected by the absence of tourist spending, with OUE Commercial REIT’s Mandarin Gallery reporting only a 70% recovery in tenant sales in 4Q20 vs the previous year’s level.
  • As Singaporeans entered shopping mode at the year-end and spent locally, non-discretionary trades did better in 4Q20, as expected. Generally, the REITs saw stronger y-o-y sales from home furnishing, jewellery & watches, and IT & telecommunications, while a polarisation effect was seen in the F&B and fashion trades. The leisure and entertainment segments remained weak, affected by temporary closures and capacity limits due to COVID-19, respectively.
  • While shopper traffic improved q-o-q, it continued to lag behind the recovery in tenant sales. Both suburban and downtown malls’ shopper traffic was capped at 60-70% of the prior year’s level due to capacity limit of one person per 8 sq m imposed by the government. With the easing of capacity limit to one person per 10 sq m since 28 Dec 2020 and as more of the office crowd gradually returns, we expect footfall to improve in 2021F, partially offsetting the potential decline in tenant sales following the higher sales from the pent-up demand in 4Q2020.

Rental deferment and pre-term requests were just a handful of tenants; rental rebates will only be given on a targeted basis

  • While the mandatory rental rebates for SMEs had a relatively large impact on landlords’ rental income, we understand that the subsequent COVID-19 measures, such as deferment of rental payment and realignment framework implemented by the government, have had minimal impact so far. We also understand that rental deferment and renegotiations arising from realignment framework requests were just a handful of tenants for now. In addition, we note that although some tenants requested for rental deferment, they continued to pay rents, indicating the request was for prudence purposes. Hence, default risk should be minimal, in our view.
  • Going forward, most landlords will continue to offer rental rebates but the quantum will be much reduced than in 2020 as it will be on a targeted basis, especially for tenants who still are unable to operate (karaoke lounges and nightclubs) or operating at significantly reduced capacity (e.g. cinemas).

Catching the e-commerce fever

  • Since the pandemic broke, landlords have launched digital platforms as more businesses realised the importance of going omnichannel.
    • CapitaLand (SGX:C31) launched eCapitaMall and online food ordering platform Capita3Eats in May 2020. eCapitaMall offers shoppers the flexibility to browse online before purchasing in-store or to browse in-store before purchasing online. For online purchases, shoppers can opt for home delivery or in-store collection. As for Capita3Eats, it is a food ordering platform that offers consumers three ways to fulfill their food orders – delivery, takeaway or dine-in.
    • Frasers Property (SGX:TQ5) Retail launched Frasers eStore in Oct 2020 and expanded its F&B marketplace, Frasers Makan Master, to include multi-brand delivery since Sep 2020.
    • SPH (SGX:T39) also launched its own online platform Shop For Good, where it offers complimentary listings of merchants’ promotional codes and discount vouchers to consumers for an exclusive period of time.
  • While the REITs are still ramping up their digital platforms and sales contribution has yet to be meaningful, we understand that the take-up from tenants has been encouraging.

Asset valuation decline is minimal at low single-digit

  • Asset valuation decline has been minimal at -3% to -4%.
  • Frasers Centrepoint Trust was the only REIT under our coverage that reported an improvement in portfolio valuation of +0.4% y-o-y in Sep 2020. Excluding Bedok Point which was valued at divestment price, portfolio valuation still remained stable at -0.1% y-o-y.
  • After reporting a 2.5% valuation (excluding integrated development assets) decline in Jun 2020 versus Jun 2019, CapitaLand Integrated Commercial Trust managed to recoup a slight valuation gain of 0.3% in its retail portfolio (excluding integrated development assets), reflecting the improving operating environment in Dec 2020 vs Jun 2020.
  • The cap rate for Singapore retail assets remained largely unchanged vs the last valuation date at 4% to 5%. Given the stabilising operating environment, we expect valuations to remain relatively stable going forward.

Gearing increased; cost of debt is expected to stay low

  • Most of the REITs reported higher gearing q-o-q in 4Q20 due to corporate exercises, such as merger and acquisitions and devaluation of the portfolio. In tandem with the lower interest rate environment, the REITs saw cost of debt declining by 0.1% points to 0.8% points q-o-q.
  • Starhill Global REIT brought down its gearing from 39.1% in 3Q20 to 35.8% in 4Q20 by issuing perpetual securities, which we believe was due to prudent management under a challenging operating environment. While the overall cost of debt increased slightly from 3.25% to 3.28% q-o-q given the higher interest rate of perp, the lower gearing provides Starhill Global REIT with higher flexibility for capital management and potential acquisitions. Now it has one of the lowest gearing among the REITs under our coverage.
  • Given the lower interest rate environment, the REITs expect cost of debt to stay low in 2021. We think Frasers Centrepoint Trust and SPH REIT may be the largest beneficiaries as these REITs have a larger portion of floating rate loan (~50% of total debt) and debt expiring (~17-20% of total debt) in FY21/22.

Challenging environment may slow down the pace of acquisitions

  • We think Lendlease REIT, Mapletree Commercial Trust and SPH REIT have the most ready acquisition pipelines.
    • Lendlease REIT has access to sponsor development pipeline across 17 gateway cities totalling A$113bn (as at 30 Jun 2020) while, in Singapore itself, it could look to increase its stake in JEM, of which it currently holds an effective stake of 3.75%. It also has access to two other malls in Singapore, namely Parkway Parade (facing disruption from MRT construction nearby) and Paya Lebar Quarter, which opened in Oct 2019.
    • As for Mapletree Commercial Trust, it has access to a few ROFR assets from its sponsor, which include HarbourFront Centre, Mapletree Lighthouse (under construction), St James Power Station (construction was completed in 2H20), PSA Vista and HarbourFront Tower 1 and 2.
    • While SPH REIT’s sponsor’s Woodleigh Mall (equally owned by SPH and Kajima Development Pte Ltd) is still under construction, we believe Seletar Mall’s (70% owned by SPH and 30% owned by United Engineers Limited) operating performance has stabilised given that the mall started operating since Nov 2014 and has gone through 2 cycles of lease renewals.
  • CapitaLand Integrated Commercial Trust’s sponsor owns ION Orchard and Jewel Changi Airport, but these assets are JVs, with the former being equally owned by CapitaLand and Sun Hung Kai Properties, a listed property developer in Hong Kong, and the latter 49% owned by CapitaLand and 51% owned by Changi Airport Group. Among the two, we believe the operating performance of ION Orchard, which opened in 2009, is likely to have stabilised and could be in the acquisition pipeline for CapitaLand Integrated Commercial Trust. Based on our checks, ION Orchard (87,811 sf GFA) generated FY20 revenue of HK$588m (S$100m) (based on 50% stake) and operating profit of HK$447m (S$77m) (based on 50% stake), with total assets of HK$4,700m (S$800m) (based on 50% stake). In the office segment, CapitaLand Integrated Commercial Trust’s sponsor has CapitaSpring, which is currently under construction and will only be completed in 2H2021.
  • Frasers Centrepoint Trust could look to raise its stake in Waterway Point from 40% to 50% if its JV partner decides to sell. Certainly, the REITs could also look at third party acquisitions in addition to sponsor’s assets.
  • We believe CapitaLand Integrated Commercial Trust’s and Frasers Centrepoint Trust’s current main focus is to bring down gearing from ~40% after a large corporate exercise in 2020. While Lendlease REIT’s gearing is lower at 35.6%, it is still trading below book. Hence, it may need to be more selective in acquisitions. We think Mapletree Commercial Trust and SPH REIT are in the best positions to make acquisitions given their relatively low gearing of 34% and 30.5%, respectively, which provide them with ample debt headroom.
  • While we think that the remaining ROFR assets may not be the best fit for Mapletree Commercial Trust’s current portfolio, these assets may become attractive at the right price. St James Power Station’s construction was completed at end-2020 and will be leased to technology company Dyson which will be moving its global headquarters to the building. We think this could be the closest ROFR target for Mapletree Commercial Trust once Dyson settles in. Mapletree Commercial Trust makes acquisitions every 2-3 years and the last acquisition – MBC II - was made at end-2019. Based on this track record, Mapletree Commercial Trust could be looking to acquire assets in the next 1-2 years.
  • For SPH REIT, we think that third-party acquisition is more likely in the near term. The REIT made acquisitions in 2018 and 2019. Given the more conservative nature of SPH REIT, we believe it could take another year for it to make another acquisition or when the operating environment stabilises.

What are the challenges ahead?

  • Overall, we think the largest challenge common to all of the REITs for 2021 is to manage the impact of weak rental reversion while making sure the malls are almost fully occupied. Suburban malls have done relatively well versus the downtown malls. However, we understand that not all tenants are recovering well in the suburban malls with certain trades still struggling.

CapitaLand Integrated Commercial Trust (SGX:C38U)

Frasers Centrepoint Trust (SGX:J69U)

Lendlease REIT (SGX:JYEU)

Mapletree Commercial Trust (SGX:N2IU) -


Starhill Global REIT (SGX:P40U)

Prefer Frasers Centrepoint Trust (SGX:J69U)

  • To sum it up, we expect shopper traffic to continue to improve going forward due to easing social distancing measures and as more of the office crowd returns. We understand that the number of tenants returned to the office as at Dec 2020 were still below the 50% capacity limit. We expect the gradual improvement in footfall and higher local spending to support tenant sales of downtown malls to hit 80-90% of the pre-COVID-19 level. Suburban malls’ tenant sales should sustain at near the pre-COVID-19 level given the much lower reliance on tourist spending.
  • We understand that footfall in January, while weaker compared to Dec 2020, remains high. More importantly, according to The Conference Board, Singapore consumer confidence index improved from 68 points in 2Q20 to 88 points in 4Q20, a tad lower vs 89 points in 4Q19. This will continue to support the propensity to spend.
  • Given the weaker tenant sales, we believe rental reversion will remain under pressure in 2021 as landlords focus on retaining tenants to maintain high occupancy. However, the weaker rental reversion potentially will be buffered by the lower cost of debt. Based on our analysis, generally every 1bp of reduction in effective cost of debt will offset the impact of 0.5% points to 1% points reduction in retail rental reversion. We have factored in -3% to -20% rental reversion in our model.
  • Our top pick remains Frasers Centrepoint Trust (SGX:J69U) as we expect it to recover faster and see less of an impact from COVID-19 as compared to its peers.
  • We also like Lendlease REIT (SGX:JYEU) due to the long lease structure of Sky Complex, which will help reduce the impact of negative rental reversion on overall income. The REIT is also trading below book at 0.9x.

Singapore REITs

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://www.cgs-cimb.com 2021-03-03
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