SINGAPORE (June 3): As Singapore gradually reopens from its circuit breaker measures, DBS analyst Derek Tan and its Singapore research team believe that retail REITs are the “preferred” sector due to earlier-than-anticipated mall openings.

While about 90% - 95% of retail malls and tenants will be given the go-ahead to resume business during the Phase 2 opening after the circuit breaker measures, Tan and the team believe that there is the possibility of them reopening earlier should the pandemic situation remain stable in the republic.

This will bode well for both landlords and tenants in 3Q20, they state in a June 3 report.

The positive outlook comes on the back of a sector-wide decline in rents and declining occupancy rates in the past quarter due to the Covid-19 global pandemic, and social distancing, as well as circuit breaker measures.

“Rental index across the central area, central region and fringe area fell 1.5%, 2.3% and 5.1% q-o-q respectively as the impact of COVID-19 took a toll on leases expiring in the past quarter,” say the analysts.

“Among the listed landlords, occupancy saw a similar sector-wide dip of 60 basis points since 4Q19. Rental reversions however, held up relatively well with a positive mid-single-digit average reversion clocked for 1Q20,” they add.

With only 18,100 square metres of prime retail malls – which makes up some 30% of the total retail pipeline for the year – completed in 1Q20, Tan and the team foresee that the low retail supply for 2020 and 2021 will help “cushion a hike in vacancy rates islandwide”.

During the previous quarter, selected retail REITs retained some 50% - 80% of their distributable income.

“[This] will sufficiently tide [them] through operational and interest obligations for the quarter”, say the analysts.

“We anticipate further income retention in 2Q20 by most of the landlords in anticipation of two new COVID-19 bills to be tabled in June to allow tenants to defer rental obligations and mandate landlords to grant rental waivers of up to two months to qualifying SME tenants,” they add.

However, Tan and the team warn that retail malls may face the risk of tenant defaults and rent deferrals, although government cash grants and further mandatory rent waivers for qualifying SME tenants should help to suppress the trend of tenant defaults.

“While we understand from the latest quarter updates that the risk of tenant defaults is low, limited to a handful within the REIT space, this figure may trend up in the coming quarter. We await the fine prints of the COVID-19 bill, which will be tabled in June, to understand the impact of rent deferral on cash flows for the rest of the year,” they share.

For CapitaLand Retail China Trust (CRCT), Tan and the team say that all of the trust’s 13 retail malls in China have since reopened with majority of tenants back in operation. Portfolio occupancy has inched down 1.3 percentage points to 95.4%. They believe the Hohhot bundle swap and further divestment of non-core, master-lease retail malls will help rebuild their portfolio.

The analysts are positive on CapitaLand Mall Trust (CMT) for its 1Q20 revenue being in line with the analysts’ estimates. Around 90% of the trust’s tenants will be allowed to resume operations as early as mid-June. The proposed merger with CapitaLand Commercial Trust (CCT) is likely to take a backseat for now, although Tan and the team believe that this will give way to a more diversified portfolio instead of a retail-focused sector.

Meanwhile, Frasers Centrepoint Trust (FCT) retained some 50% of its 1Q20 distribution per unit (DPU), which amounts to some $18 million to tide through working capital and operational expenses for April and May.

“[The] further unwinding of sponsor’s stake in PGIM ARF [is said] to lengthen inorganic growth runway as early as 2H20,” the analysts note.

Lendlease Global Commercial REIT’s 3Q results in May, exceeded IPO forecasts for the quarter, with a 100% payout ratio. Its centrally-located mall, [email protected] saw tenant sales fall by 15%-20% y-o-y, with a steady occupancy rate at 99.2%.

Mapletree Commercial Trust (MCT)’s 4Q19/20 gross revenue grew on contributions and a strong tenant profile at MBC 1 and MBC II, despite the Covid-19 impact on VivoCity. “A larger MCT would now have room to take on development projects at Harbourfront Centre,” say the analysts.

Mapletree North Asia Commercial Trust (MNACT) is bottoming out of rental income as its anchor asset, Festival Walk in Hong Kong, reopens ahead of expectations. The analysts expect MNACT to gradually diversify its exposure away from the mall. In FY21F, Festival Walk is projected to contribute around 55% of the REIT’s net profits interest (NPI).

SPH REIT has a positive 6.7% rental reversion across all Singapore retail malls, with a stable occupancy rate at 98.9%. Tan and the team believe the REIT will unlikely have to provide further rental relief under the Fortitude Budget owing to their 2.3 months of rental rebates to selected tenants. However, their outlook for the REIT’s Paragon asset is mixed in the face of Covid-19.

Following China’s reopening, all four of Sasseur REIT’s outlet malls are now in full operation and re-opened to an encouraging 129% hike in tenant sales. The REIT has the lowest gearing within the sector at some 28%, which gives Sasseur REIT sufficient gun powder for yield-accretive acquisitions, which the analysts have not priced in.

DBS Group Research has recommended “buy” calls for CapitaLand Retail China Trust, CapitaLand Mall Trust, Frasers Centrepoint Trust, Lendlease Global Commercial REIT, Mapletree Commercial Trust, Mapletree North Asia Commercial Trust, and Sasseur REIT, with target prices of $1.55, $2.15, $2.65, $0.89, $2.25, $1.05, and $0.80 respectively.

The group has recommended a “hold” call for SPH REIT with a target price of $0.80

As at 11.28am, CapitaLand Retail China Trust units are changing hands down 0.7% at $1.37; CapitaLand Mall Trust 2.3% up at $2.18; Frasers Centrepoint Trust 0.8% up at $2.55; Lendlease Global Commercial REIT 0.7% down at 72 cents; Mapletree Commercial Trust up 0.5% at $2.08; Mapletree North Asia Commercial Trust up 1.7% at 91.5 cents; SPH REIT up 2.8% at 90.5 cents; and Sasseur REIT down 1.3% at 78.5 cents.