For investors, the beneficiaries of the eventual recovery in tourism are likely to be the owners of the dominant malls along Orchard Road. These will likely be ION Orchard, Paragon, Ngee Ann City, Wisma Atria, 313@Somerset and perhaps The Centrepoint.
Plum sites along the so-called “West Orchard Road” — a moniker coined by OCBC Securities some years ago — are held by Hotel Properties, which also has a stake in Paragon REIT, which owns Paragon.
First off, a word of caution. To date, the droves of tourists that were expected with mainland China’s opening have yet to materialise. With China’s slowdown, the familiar sight of free-spending Chinese tourists queuing to gain entry to the luxury boutiques of Paragon, ION Orchard and Ngee Ann City may not reappear anytime soon.
CBRE says prime retail rents for all submarkets continued to rise in 1Q2023 and 2Q2023, buoyed by the recovery of the Orchard Road, City Hall and Marina Centre and fringe areas and the resilience of the suburban market. In 2Q2023, Orchard Road rents rose 1% q-o-q and 2.9% y-o-y to $35.20 psf per month (ppm). “With improved tourism recovery and below-historical-average of new retail supply in the next few years, CBRE expects overall retail rents to remain on the path of recovery in 2023,” a CBRE update says.
Iconic shopping mall ION Orchard, located at the start of the main part of Orchard Road, was developed by CapitaLand and Sun Hung Kai Properties and is 50% held by CapitaLand Investment (CLI) and 50% by Sun Hung Kai Properties.
As at Dec 31, 2022, CLI’s real estate assets under management (AUM) stood at some $132 billion. As at June 30, 2022, Sun Hung Kai Properties had around HK$807 billion ($137 million) in assets. Investors wanting a part of ION’s action will have to wait until the mall someday becomes part of CapitaLand Integrated Commercial Trust (CICT).
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
CICT is the largest S-REIT by market capitalisation and has more than $24 billion in AUM. It also owns a mall at the other end of Orchard Road, Plaza Singapura and the adjoining The Atrium@Orchard. In FY2022 ended Dec 31, 2022, CICT reported gross revenue of $1.44 billion and net property income of $1.04 billion.
Plaza Singapura’s contribution to revenue was $87.4 million, and The Atrirum@Orchard contributed $47.3 million. Plaza Singapura’s net property income (NPI) was $64.2 million in FY2022, and The Atrium’s was $35.6 million.
Luxury retail
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
For a more pronounced Orchard Road play, look no further than Paragon REIT and its namesake property, Paragon.
Paragon is not just a luxury retail mall, it also houses medical suites that attract affluent regional visitors. As at March 31, Paragon was 100% occupied. The mall comprises 717,540 sq ft of net lettable assets (NLA). Paragon Medical comprises approximately 90 medical and dental specialist clinics and offices. These specialist clinics provide medical services ranging from cardiology, orthopaedics and urology.
Paragon is the main asset in Paragon REIT although it does not have the highest NLA. Last year, Paragon contributed 59% to Paragon REIT’s gross revenue and 60.6% to its NPI. Paragon REIT is gradually diversifying its assets to lower its reliance on Paragon and the Orchard Road crowd by acquiring a couple of malls in suburban Australia.
Although Orchard Road rents have improved during the year, some malls have yet to record positive rental reversions, indicating better times ahead regarding rental revenue. Based on Paragon’s figures for 2022, it recorded –4.3% in rental reversions. Paragon’s tenant sales have just about recovered to pre-Covid-19 levels, but footfalls have not quite reached pre-pandemic levels.
Starhill Global REIT owns a 27.23% stake in Ngee Ann City and a 74.23% stake in Wisma Atria. Both properties comprise office towers and a mall. The retail portion contributed around 48% and 49% to the revenue and NPI of the REIT in FY2023 ended June, respectively.
Full occupancy
According to a statement by Starhill Global REIT’s manager, its Singapore properties, including offices, achieved full occupancy on a committed basis in FY2023. The manager adds that tenant sales and shopper traffic at Wisma Atria Property (Retail) increased 17.1% and 23.3% y-o-y, respectively.
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CGS-CIMB says strong reversions on leases signed in 4QFY2023 have delivered FY2023 reversions in the mid-single digits for Wisma Atria retail compared to double-digit negative reversions in FY2022.
“Management said that in this leasing cycle, it prioritised concept (through tenant remixing) over rents at Wisma Atria and aims to push average rents towards $30 ppm in the next leasing cycle,” CGS-CIMB says in a report.
The manager has announced an asset enhancement initiative to widen the walkway in its basement one link connecting Wisma Atria to ION Orchard. It is targeted to start in August and will be completed next March.
Lendlease Global Commercial REIT (LREIT) is listed with two assets, 313@Somerset in the heart of Orchard Road and Sky Complex in Milan that comprises three office buildings. At the time of listing, 313@Somerset was a meaningful contributor to revenue and NPI. In 2022, LREIT acquired the stake in Jem it did not own. In 1HFY2023 ended December 2022, Jem and its office tower contributed 61% to LREIT’s revenue, while 313@Somerset contributed just 27%.
Investors who decide to give the REITs a miss could focus instead on Bonvests Holdings, which owns Liat Towers, Sheraton Towers, Four Point by Sheraton in Perth, some commercial units on Murray Street in Perth and Colex Holdings.
Bonvests’ share price of $1 is trading at just 047 times its net asset value (NAV) of $2.10. In FY2022, Bonvests paid 1.6 cents in dividends, representing a 31% payout ratio. Market observers caution that Bonvests may be a value trap as it perennially trades at a hefty discount to NAV.
Lastly, HPL is, of course, the undervalue Orchard Road play should it decide to redevelop its stretch of West Orchard Road.
