1. What are the key focus areas for BHG Retail REIT in the next two to three years?
BHG Retail REIT is Singapore’s first pure-play China Retail REIT. It has a portfolio of six retail properties located in major cities, namely Beijing, Chengdu, Hefei, Xining and Dalian. These are all community-focused retail properties situated in high population density areas frequented by growing middle-income residents. Each mall also has a Beijing Hualian Hypermarket as the anchor tenant.
In light of Covid-19, part of our focus now is to keep our mall spaces safe for our stakeholders. We have stepped up hygiene standards, and also enforced temperature screenings and location tracking. Our staff and tenants are working together to engage our shoppers through live broadcasts, promotional activities, chatgroups, online contests and rewards redemption. We are also gradually resuming some in-mall events.
Covid-19-aside, we proactively take on asset enhancement initiatives to maximise the use of our mall spaces while keeping our product and tenant mix relevant for our customers. This includes creating relevant themed spaces and undertaking tenancy resizing exercises to convert spaces into new concepts and brands to widen our product offerings and increases our rents.
We will also continue to seek potential yield-accretive acquisition opportunities through our sponsor’s pipeline and third-party properties to create value for our unitholders. Last year, we acquired yield-accretive Hefei Changjiangxilu at an attractive net property income yield of 6.0%.
2. What role does sponsor, Beijing Hualian Department Store, play in your growth strategy?
Beijing Hualian Department Store is part of Beijing Hualian Group Investment Holding. It plays a vital role to the REIT’s growth by providing organic growth and a visible pipeline of potential acquisitions. With the sponsor’s core businesses spanning the entire retail value chain, BHG Retail REIT benefits from the sponsor’s strong networks and in-depth knowledge of consumers’ needs.
Our sponsor is also a highly experienced retail mall operator that manages the REIT’s properties, supervises the malls under management, and creates strategic retail partnerships.
3. What would you maintain or change in terms of this mix?
In terms of net lettable area, supermarkets form the largest segment at some 40% of the mix, followed by F&B and fashion segments. The remaining segments are made up of children education, cinema and recreation, and other services. Attracting and maintaining the right tenants is important to our malls. We frequently engage our shoppers and look to improve our mix with brands and products that cater to our customers’ needs.
4. Situated in high-density prime residential areas, your malls have maintained a focus on experiential and lifestyle segments. How has this benefited the REIT?
More than 60% of gross rental income and about 80% of net lettable area are from our experiential and lifestyle segments. These include grocery shopping, catching up with family and friends over a meal, watching a movie, and children attending enrichment classes, which can lead to secondary spending at our malls. A larger part of our traffic comes from recurring visitors, given that we are a one-stop destination serving the local communities. This strategy enables us to achieve stable visitor traffic and also tap rising income and domestic consumption levels in China.
5. What is BHG Retail REIT’s typical lease structure like?
Save for anchor tenants with longer leases, our leases typically range between one and three years. This provides opportunities for progressive uplifts in rental income and tenancy remix. The REIT has a WALE of 3.4 years based on gross rental income and 7.1 years based on net lettable area as at Dec 31, 2019. A large number of tenancy agreements have built-in rental escalations, and the rent structure also provides for upside based on tenants’ sales turnover. In the latest financial year, our portfolio of six quality assets continued to achieve healthy rental reversions.
6. How does BHG Retail REIT intend to manage its growth?
Firstly, we hope to achieve this through the proactive management of assets and tenancies through partnerships with tenants, better marketing strategies, improving rents and occupancy rates, and tapping on the sponsor’s retailer network and experience.
Secondly, through proactive asset enhancements to achieve better efficiency and higher rental potential. In 2019, we completed an exterior rejuvenation exercise at Chengdu Konggang and introduced an outdoor food lane to elevate the mall’s visibility and appeal. At Hefei Mengchenglu and Beijing Wanliu, we resized larger tenants into smaller spaces and introduced fresh concepts, while increasing per square metre rents.
Thirdly, we plan to achieve this through exploration of potential acquisition opportunities. The acquisition of Hefei Changjiangxilu was completed in April 2019 and we continue to explore opportunities via our sponsor’s pipeline and third-party properties. We look at criteria such as yield accretion of the properties, location and connectivity, concentration of competitors, and potential for asset enhancement. Although our current focus is in China, we are open to evaluating acquisition opportunities overseas.
7. What is your outlook on China’s retail sector? How do you plan to sustain the performance of your malls following the slowdown of China’s economy with Covid-19?
Despite Covid-19, China’s retail sector has been resilient versus other markets. Several monetary and fiscal policy measures have also been announced by the government to support Chinese businesses and residents through the pandemic.
Pre-pandemic, China’s GDP grew at a 6.1% y-o-y in 2019, with retail sales growing 8.0% y-o-y. Disposable income and expenditure per capita for urban residents grew 7.9% and 7.5% y-o-y, respectively. We are hopeful that the Chinese middle-income purchasing power will continue to grow post-pandemic.
Post-Covid-19, we will continue to explore organic strategies such as anchor space resizing, tenancy rejuvenation, new retail concepts, to maintain our strong occupancy rates of more than 90% and rental uplift.
8. What are some challenges facing the China retail industry and how do you maintain your competitive edge against peers?
One challenge that we face is having to keep up with the demands of our shoppers. Consumers are always seeking new products and brands from overseas and online.
We need to respond carefully by calibrating the tenant mix of malls, quality of tenants, and even the products being sold, to keep up with changing consumer trends while serving the local community, and to ensure that customers have a pleasant and fulfilling experience at our malls.
9. What are the factors that are critical to BHG Retail REIT’s success in this highly competitive and rapidly evolving landscape?
Firstly, we want to maintain strong organic growth and stay ahead of consumer demands through asset management and enhancement strategies. Post-Covid-19, we want to continue riding on the trend of higher middle-income spending.
Secondly, we will continue seeking yield-accretive acquisition opportunities and deliver value for the REIT and our unitholders.
Thirdly, as we grow, we aim to increase investors’ awareness of the REIT and garner stronger interest among the S-REIT investment community.
Finally, BHG Retail REIT will remain committed to operate with a strong corporate governance culture.
10. What is BHG Retail REIT’s value proposition to its shareholders and potential investors?
BHG Retail REIT provides a gateway to capitalise on China’s middle-income population’s income growth. We have a strategy to capture the non-discretionary recurring consumption spending in densely populated residential neighbourhoods. In addition, having a sponsor group with a strong retail footprint in China that targets both middle-income consumer segments and internationally renowned luxury segments, provides the REIT with vast opportunities, from strategic retail collaborations to acquisition opportunities.
Emelia Tan is a research analyst with Singapore Exchange
