Singapore Retail REITs - DBS Research 2021-05-19: Better Prepared For The Downtime

Singapore Retail REITs - DBS Research | SGinvestors.io LENDLEASE GLOBAL COMMERCIAL REIT (SGX:JYEU) FRASERS CENTREPOINT TRUST (SGX:J69U)

Singapore Retail REITs - Better Prepared For The Downtime

  • Curbs for dine-in will affect a wider spectrum of retail trades on top of F&B.
  • Landlords have embarked on differentiated strategy to retain consumer spend within the mall’s eco-system.
  • Prefer suburban malls for their proven resilience and exposure to “essential trades”, which will hold up even in the case of an unexpected extension of the measures.
  • Prefer Frasers Centrepoint Trust (SGX:J69U) and Lendlease REIT (SGX:JYEU) among the retail-focused names.



Landlords’ response to Phase 2 (heightened alert) to keep businesses afloat


Malls to see fall in traffic.

  • The recent spike in COVID-19 community cases has led to the implementation of Phase 2 (Heightened Alert) from 16 May to 13 June. While a review will be conducted in two weeks’ time (estimated to take place on 30 May) to look at the prevailing public health situation and see if there is a need to make further adjustments. The impact of reduced social gathering size and visitors per household to be reduced from five to two, and the prohibition of dining-in at restaurants will have an immediate impact to retail landlords, especially the ones in Orchard Road.

Holistic rental assistance packages offered by landlords.

  • The major retail landlords have reiterated their support for tenants through Phase 2 (heightened alert) through providing marketing and possible rental assistances. See the summary of initiatives in report attached below.
  • We believe these relief measures will assist businesses to get through the near-term tough operating climate and minimise possible businesses closure risks in the medium term.


How will malls perform?


F&B trade is vital for the mall’s traffic; other retail trades may be similarly impacted as crowds thin in the coming month.

  • The F&B trade, which is directly impacted by the tighter measures, is one of the key retail trade sectors for most retail malls and account for ~30%-35% of NLA. The F&B Trade had been the first to recover in the wake of the circuit breaker (CB) in the 2nd half of 2020.
  • With dine-in prohibited and social gatherings now limited to two persons from five persons, we see that selected F&B trades, especially the restaurants and fine-dining establishments will likely see their business drop significantly as customers and families choose to stay in. F&B establishments located at or near the Central Business District (CBD) which are dependent on the office crowd will also be more adversely affected due to companies pivoting towards working from home (WFH) in the coming month.
  • While we believe that most F&B establishments are “more ready” this time round and have already engaged online delivery platforms (either offered by the landlords or 3rd parties), the orders from take-in will likely be far lesser than what a typical dine-in customer will be ordering and thus sales will likely fall.
  • With the expected decline in foot traffic at the malls, especially from families, and while brave couples may head out to shop (or window shop) in the coming months, overall mall sales from other trades like fashion, beauty, services (for those still allowed to trade), will likewise see a dip in sales over the period.

Suburban malls to continue to outperform.

  • Among landlords, we believe that Frasers Centrepoint Trust (SGX:J69U)’s portfolio is structurally stronger post COVID-19, leveraging on the trend that workers will likely spend a bigger portion of their working lives at home in the near term and also in the future, as more “flexible work” arrangement takes some form of permanence over time. This will imply increased traffic and money spent at Frasers Centrepoint Trust’s suburban malls over time, as workers continue to work from home.
  • As seen in the previous circuit breaker back in Apr-June 2020, we noticed that not only Frasers Centrepoint Trust’s sales performance has been more resilient in the downturn but its recovery has also been faster and its performance has moved closer to pre-COVID-19 levels as well. We believe similar trends to persist in the next month when malls remain substantially closed for dine-ins.


Offering online platforms to keep consumers within the mall’s “ecosystem”


A sharp recovery anticipated once measures are lifted.

  • The impact on sales is likely to be significant in the near term and landlords are quick to respond with targeted assistance programmes. We believe that this time round, the assistance programmes will adopt a more holistic approach in comparison to the Circuit Breaker last year, when financial assistance made up the bulk of the solution. The various initiatives by the landlords aim to divert ‘offline’ sales to their respective online platforms (owned by the landlords).
  • While locational proximity plays a big role in online sales in terms of delivery cost and waiting time, landlords were quick to rule out promotion packs such as free delivery that makes for a smooth offline to online transition for consumers. This semi-circuit breaker would be a good test bed to see how well online platforms such as Fraser’s Makan Master compare to those of delivery giants like Grab and Food Panda. The former will benefit landlords as opposed to third-party platforms, as landlords test the resilience of the retail eco-system they have fortified since Circuit Breaker last year. Either way, it will hopefully mean that consumers are stickier in the immediate and longer term, as they get “plugged in” to reflect less negatively on tenant sales in the coming quarter.
  • Given that most residents are still gainfully employed and with higher “savings” through this phase 2 (heightened alert) period, we expect to see a swift rebound in sales (revenge shopping!) upon the relaxation of the measures come the middle of June 2021 (hopefully), if the number of cases dwindles.

Possible impact to landlords if rental assistance is dished out.

  • With assistance likely to be targeted and without any assistance from the government like the circuit breaker (CB) period, landlords are likely to be coming out with most of these assistance programmes out of their own pockets. In our worst-case scenario, assuming a portfolio-wide 1-month rental waiver, we anticipate declines of 6% to 10% in our FY21 DPU estimates (which we have not priced in yet).
  • At this moment, we understand that most landlords have not given any guidance on the actual rental assistance packages that are on offer but we believe that they are likely to be subject to targeted and actual sales performance – under which, we believe that the actual outcomes may be better than our scenario. Even with the 1-month rental waiver, we estimate that FY21 DPUs are in general still higher than those for FY20, where landlords withheld distributions in the face of the uncertain operating climate.

S-REIT share prices have remained firmed despite initial worries


Share prices have remained surprisingly firm; investors should “look through” this period of operating weakness and focus on the recovery.

  • The share prices for the affected sectors (especially the retail and office S-REITs) have declined by ~10% from the share price peak in 2021 and have since held fairly firm since the announcement of this series of tighter measures (from 14 May 2021), which is a pleasant surprise.
  • This may possibly mean that investors are expecting this period of interim operating weakness to be confined within a month (hopefully) and a swift rebound in metrics once the easing of these measures kicks in by the end of May 2021 or middle of June 2021.
  • The prices of retail-focused S-REITs have recovered from the initial drubbing of up to -5% when the government announced tighter measures last week to contain potential COVID-19 community transmission. This surprise strength implies that investors are willing to “look beyond the operational hump” and towards a recovery, which is likely to be immediate if Singapore can swiftly contain the community spread by the middle of June 2021.
  • Among the retail S-REITs, our pick is Frasers Centrepoint Trust (SGX:J69U), given its exposure to the more resilient “essential tenant trades” and Lendlease REIT (SGX:JYEU) for its attractive valuations and dominant positioning of 313@somerset.





Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-05-19
SGX Stock Analyst Report BUY MAINTAIN BUY 0.900 SAME 0.900
BUY MAINTAIN BUY 3.000 SAME 3.000



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