SINGAPORE (Jan 2): Maybank Kim Eng is initiating coverage on Singapore’s retail REIT sector with a “negative” rating on the belief that rising rates, peak new supply in 2018 and fair valuations should restrain near-term price upside.
This comes even as the sector is currently enjoying a cyclical recovery from a rebound in tourism and a more constructive economic landscape.
In a Tuesday report, analyst Chua Su Tye cautions of “daunting” structural challenges faced by Singapore’s retail REITs, given the persistence sales leakages from outbound travel and growing e-commerce competition which could see online penetration of retail sales climb to 10-20% from 4.6% presently.
With suburban malls capturing a growing share of retail expenditures and likely to face new supply, which is expected to peak in 2018, Chua expects the opening of Changi Airport’s Project Jewel to further pressure rents for eastern malls.
“We think Frasers Centrepoint Trust (FCT) could be more resilient, as its three malls [Causeway Point, Yew Tee Point and Northpoint] which make up 80% of its assets under management (AUM) are in the north,” comments Chua.
The REIT has been initiated as Maybank’s sole “buy” pick with a target price of $2.45 with 14.4% total return upside, versus 0-11% downside for its peers.
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This is because Chua anticipates FCT’s valuations – now close at the 11-year historical mean – to be supported by stronger rental reversions in the year ahead as well as possible upside from acquisitions, which he believes should further strengthen the REIT’s suburban mall retail footprint.
“We estimate 77% of its tenant portfolio is skewed towards necessity retail sectors, and 75% of its leases to be relatively resilient to e-commerce competition. We see limited competition from the upcoming Changi Airport Jewel, although its Changi City Point asset could see stronger gains in occupancies and rentals, with proactive repositioning of its outlet malls concept given the reopening of DTL 3,” explains the analyst.
Chua further notes that valuations for FCT remain undemanding at 5.3% DPU yield at a unit price of $2.24, given its visible growth drivers, strong balance sheet, and potential acquisition upside. Underscoring the REIT’s strong asset enhancement initiative (AEI) track record, he believes average gross rentals at its Northport City’s North Wing could improve by 9% post-AEI.
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In contrast to the weaker outlook for suburban malls in Singapore, Chua expects prime Orchard Road rentals to stage a recovery over the year due to tight supply.
The analyst has a “sell” recommendation on Starhill Global REIT (SG REIT) at a target price of 70 cents, as he finds its units moderately overvalued given how its overseas expansion has yet to reach scale and gain traction, in his view, given that their contributions have stayed at 32-34% of the REIT’s AUM over FY11-17.
Instead, he sees SPH REIT as a better proxy to stronger tourist arrivals and recovery in the prime Orchard Road rents given its two assets, Paragon mall and Clementi Mall.
The former is set to benefit from the rental recovery given its size and more upmarket tenant mix, according to Chua, while the latter is located in a mature residential estate. Both are well-placed amid an improving retail sales outlook with catalysts from stronger shopper traffic and tenant sales, he adds.
However, as SPH REIT’s units have appreciated sharply since its 2013 initial public offering (IPO) with valuations largely pricing in potential acquisition of Seletar Mall, the REIT has been rated “hold” at a target price of $1.10.
“SPH REIT is trading at peak valuations since its IPO with a FY18E yield of 5.2% and P/B of 1.1 times. We believe these largely price in potential acquisitive growth, given 1% DPU growth,” notes Chua.
As at 11:55am, units in FCT, SG REIT and SPH REIT are trading at $2.26, 78 cents and $1.06 to imply FY18F dividend yields of 5.35%, 6.4% and 5.35% respectively.
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