DBS Group Research analysts Geraldine Wong and Derek Tan say that Singapore’s retail sector is at an inflection point, with more positives in 2022 as consumer confidence remains high and tourists return, with top picks Frasers Centrepoint Trust (FCT), CapitaLand Integrated Commercial Trust (CICT), Lendlease Global Comm REIT (LREIT) and CapitaLand China Trust (CLCT) for overseas retail maintained.
According to Wong and Tan, retail value (ex-F&B) has recovered to approximately 92% of normalised levels despite periodic “lockdowns” as local spending continued to outweigh the “lost tourist dollar”.
“We believe that the pivot to more online spending will not be a significant disruptor in Singapore, as we have seen landlords and tenants embark on an omni-channel strategy with brick-and-mortar stores complementing online offerings,” say the analysts. “With brighter economic prospects driving wage increases coupled with tourists returning into our shores, we see the retail sector on a stronger footing come 2022.”
Additionally, Wong and Tan foresee more catalysts ahead, with stronger traffic at malls to drive further upward trajectory in tenant sales, and retail S-REITs to post an approximate 5.6% jump in distributions.
“With Singapore’s ‘endemic approach’ towards the COVID-19 pandemic, we believe that the risk from the Omnicron virus is unlikely to lead to a fullblown domestic lockdown. We believe that it is only a matter of time that border reopening and further domestic relaxation will restart sometime in 1QFY2022,” say the analysts.
Vaccinated travel lanes with partner countries encompass approximately 57% of historical inbound markets and will be a lift to tourist retail sales in FY2022 as well. In addition, the potential relaxation of restrictions on “atrium sales” will be a positive earnings surprise for selected landlords–FCT, MCT, and CICT, which contribute between 3-5% of revenues, which have been “lost” since 2020.
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Sector valuations are currently trading below book at 0.97 times close to its five-year historical mean of 1.01 times, where forward FY2022 yields are compelling at 5.6% for defensive big cap names FCT and CICT, according to the analysts.
“We see lower downside risk of rental rebates in 2022 and conservatively priced in 0.5 months in our view, from 1-1.5 months this year,” say Wong and Tan.
Wong and Tan maintain top sector picks FCT on resilient tenant sales, CICT, and LREIT on border reopening and domestic relaxation play. “We also pick CLCT amongst foreign retail plays for attractive valuations at a 0.8x book and a rare 8% forward yield,” the analysts added.
