Is the worst over for Sin­ga­pore’s em­bat­tled REITS?

Rents have been in a three-year slump but an­a­lysts fore­see a re­cov­ery.

Singapore Business Review - - ANALYSIS: S-REITS -

The loom­ing sup­ply of new re­tail space to be in­stalled in the next four years in Eastern Sin­ga­pore is ex­pected to pose a larger threat to the per­for­mance of the city’s strug­gling real es­tate in­vest­ment trusts (S-REITS) than the spec­tre of on­line shop­ping gi­ants, ac­cord­ing to Moody’s In­vestors Ser­vice. Around 2.5 mil­lion sqft of re­tail space is ex­pected to be de­vel­oped un­til 2019, es­ti­mates Ed­mund Tie & Com­pany. Such level of sup­ply is ex­pected to keep a re­cov­ery in rents to a min­i­mum, Moody’s ar­gued.

Af­ter a mild 0.1% re­cov­ery the ear­lier quar­ter, re­tail rents once again fell by 1.1% in Q2, ac­cord­ing to data from the Ur­ban Re­de­vel­op­ment Au­thor­ity, ex­tend­ing a per­sis­tent down­ward trend since Q3 2015.

Play­ers like Sun­tec REIT, Cap­i­ta­land Com­mer­cial Trust and Maple­tree Com­mer­cial Trust which hold con­sid­er­able as­sets in other prop­erty seg­ments and geo­graph­i­cal lo­ca­tions are more likely to weather through the weak­ness in Sin­ga­pore’s re­tail mar­ket than their peers, Moody’s added. If in­vestors are look­ing for big­ger bang for their buck, the re­tail sec­tor may not be the ul­ti­mate choice in light of weak mar­ket con­di­tions. Sin­ga­pore’s REIT mar­ket of­fers a myr­iad of in­vest­ment pos­si­bil­i­ties, be­ing the sixth largest in the world and third in Asia with a mar­ket cap of US$53B as of Fe­bru­ary, ac­cord­ing to Q In­vest­ment Part­ners.

“The re­tail sec­tor is not a pre­ferred pick for now vs other sec­tors like Of­fice and in­dus­tri­als who of­fer bet­ter growth vis­i­bil­ity, which we be­lieve to be a main driver for out­per­for­mance,” Derek Tan, vice pres­i­dent at DBS Vick­ers Se­cu­ri­ties said.the sen­ti­ment was echoed by Kr­ishna Guha, eq­uity an­a­lyst at Jef­feries, who cau­tioned that REITS still need to be judged for their rental re­ver­sion, oc­cu­pancy, gear­ing amongst other fun­da­men­tals.

“At sub­sec­tor level, we like in­dus­trial (busi­ness parks) and hos­pi­tal­ity. We like of­fice se­lec­tively while be­ing cau­tious on re­tail,” he said. How­ever, REITS re­main at­trac­tive for most re­tail in­vestors es­pe­cially since they of­fer at­trac­tive div­i­dend yields as they dis­trib­ute at least 90% of the prof­its, ac­cord­ing to David Ger­ald, pres­i­dent and CEO of Se­cu­ri­ties In­vestors As­so­ci­a­tion Sin­ga­pore (SIAS).

“REITS too are im­prov­ing their dis­clo­sure prac­tices as can be seen in re­search an­nounced to­day. Nev­er­the­less, in­vestors should have a di­ver­si­fied port­fo­lio so as to mit­i­gate risks, like grow­ing e-com­merce adop­tion es­pe­cially for those in­vested in re­tail mall REITS,” he added.

This was echoed by Jef­feries’

Guha. “All REITS in Sin­ga­pore have a gear­ing thresh­old of 45%. So, un­less there is an ex­ter­nal shock which sig­nif­i­cantly low­ers val­u­a­tion of prop­er­ties, fi­nan­cial risk is limited.”

Al­though S-REITS have only a num­ber of levers to off­set weak­ness in the re­tail sec­tor, land­lords could still de­ploy a num­ber of strate­gies to eke out gains, Jef­feries’ Guha added.

“Re­tail land­lords can change trade mix, ten­ant mix, lease tenor and struc­ture, mall ef­fi­ciency as well as lower op­er­at­ing ex­penses. If op­er­at­ing yields can­not be im­proved, SREITS can re­cy­cle cap­i­tal by rein­vest­ing, de-gear­ing or dis­tribut­ing di­vest­ment gains.”

“In terms of longer term trends, brick and mor­tar re­tail will be sup­ported by ini­tia­tives of land­lords to keep malls at­trac­tive and rel­e­vant to shop­pers, the pref­er­ence of Sin­ga­pore­ans for phys­i­cal shop­ping, and the coun­try’s po­si­tion as a re­gional shop­ping hub,” Saranga Ranas­inghe, Moody’s as­sis­tant vice pres­i­dent and an­a­lyst said in a re­port.

Around 2.5 mil­lion sqft of re­tail space is ex­pected to be de­vel­oped un­til 2019.

Sasseur Reit’s He­fei Out­let

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