Lendlease Global Commercial REIT (LREIT) remains the top pick of DBS Group Research analysts Geraldine Wong and Derek Tan, as they mull the future of domestic consumer trends and how they’ll affect the malls along the Orchard Road belt.

Dubbed as a shopping paradise for domestic and foreign shoppers alike, malls along Orchard Road were one of the first few to be negatively impacted by the Covid-19 pandemic. The impact was keenly felt when Singapore closed its borders, causing tourist footfall to trickle to a halt.

“Shopper footfall plunged to a low of 20% of normalised levels during the circuit breaker period [from April to June 2020]. Almost one year in, the aftermath of a Covid fever still reverberates with the Orchard malls, albeit to a lesser extent, in terms of shopper traffic and tenant sales that are currently still hovering below pre-Covid levels,” note the analysts in a Feb 18 report.

While they believe that domestic trends may “surprise in the near term” despite the uncertainties on the return of tourist arrivals in 2021, the analysts also note that shopper traffic and tenant sales in Orchard Road have lagged against the broader retail index.

Figures in the broader retail index have indicated that sales have narrowed to pre-Covid-19 levels in December 2020 at with a 0.9% decline y-o-y.

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That said, Wong and Tan believe the trend will further narrow down driven by the various festive occasions in 1Q2021.

“We see greater upside potential for the F&B, luxury, health & beauty and IT & electronics trade sectors in declining order of preference,” they write.

“We see greater catalysts for F&B given the increased table capacity from five to eight people since the commencement of Phase 3 measures, which should support demand for group dining going into the Chinese New Year and hopefully, beyond,” they add.

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It’s a ‘buy’ for LREIT, and ‘hold’ for SPH REIT and Starhill Global REIT

Among the REITs that have properties on Orchard Road, Wong and Tan have maintained “buy” on LREIT with a target price of 90 cents, and “hold” on SPH REIT and Starhill Global REIT (SGREIT) with target prices of 80 cents and 55 cents respectively.

“LREIT is well-placed as our top Orchard pick given its 39% exposure to the F&B sector where we see immediate upside to normalisation, future-positioned mall with a continuous effort to scale its omnichannel share a step ahead of SGREIT and SPH REIT, 30% stable revenue contribution from office asset Sky Complex, and forward yield of 6.6% that is attractive on a risk-to-reward perspective,” say the analysts.

Based on tenant trade exposure and earnings buffer, Wong and Tan say they prefer LREIT and SGREIT to SPH REIT due to “limited downside risks” to SGREIT’s 43% master lease exposure and LREIT’s 39% exposure to the F&B segment.

“On the same note, recovery looks to be priced in at $4,450 psf for Paragon mall. We cast an eye on the potential downside earnings from the potential nonrenewal at Metro Department store in the coming few years, which accounts for around 9% to Paragon mall, in our estimates,” they say.


The current share prices of all three REITs imply a valuation of $1.10 billion, $1.48 billion and $2.74 billion for LREIT’s [email protected], SGREIT’s Wisma Atria and Ngee Ann City, and SPH REIT’s Paragon Mall respectively.

On a price per sq ft (psf) basis, SPH REIT and SGREIT look to be at a discount due to their office and medical net lettable asset (NLA), which is estimated to be valued lower at $2,400 psf based on Orchard Road rent rates compared to retail space in the same area.

Wisma Atria and Ngee Ann City also have shorter lease terms of 40 and 51 years respectively compared to the 84 years for [email protected] and 91 years for Paragon Mall.

“This was a factor that caused SGREIT to trade at a P/NAV discount relative to peers. Based on our calculations, retail price is estimated at $2,382 psf and $4,450 psf for SGREIT and SPH REIT respectively if we strip out the non-retail component,” note the analysts.

“On a relative basis, SPH REIT’s current trading level looks to be closer to the market value of the asset, with a faster pace of recovery priced in as compared to both LREIT and SGREIT,” they add.

The analysts have also estimated a more attractive implied valuation per sq ft (psf) for LREIT at $3,800 psf and SGREIT at $2,400 psf.

“While SGREIT’s valuation appears to be low, it is justified by a shorter lease term remaining of around 45 years as opposed to its peers’ 84-91 years.”

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LREIT as top pick; SGREIT over SPH REIT

In addition to maintaining its top pick on LREIT, the analysts have indicated that they prefer SGREIT over SPH REIT, even though the former is a “laggard” on three fronts: share price performance, P/NAV and dividend yield.

SGREIT’s share price performance is behind both LREIT and SPH REIT even though it has almost half, or 49.5% of its gross rents on a “relatively stable basis” in comparison to SPH REIT’s rents at 12.4% from its medical and office leases.

However, the analysts say they expect “near-term share price normalisation for SGREIT to trade closer to mean, supported by earnings visibility through a 50% revenue contribution from master lease and anchor leases”.

On a P/NAV basis, all three REITs are trading below the sector average of 0.97 times, and below book at 0.93 times for SPH REIT, 0.64 times for SGREIT and 0.91 times P/NAV for LREIT.

Both SGREIT and SPH REIT are trading within the range of -1 and -2 standard deviation (s.d.) of historical range.

For dividend yields, the analysts estimate SGREIT to deliver the highest FY2022 forward yield at 7.7% followed by LREIT at 6.6% and SPH REIT at 6.6%.

“Our forward FY2022 distribution per unit (DPU) estimates remain conservatively below FY2019 levels on the assumption that tourist traffic will only normalise in FY2024 or beyond,” they write.

“All three Orchard plays are trading at a current 30- to 80-basis point yield premium to the sector average of 5.8%,” they add.

As at 12.09pm, units in LREIT, SGREIT and SPH REIT are trading at 78.5 cents, 52 cents and 82 cents respectively.