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UOB Kay Hian maintains 'overweight' rating for retail REITs sector; suburban malls 'fundamentally' attractive

Bryan Wu
Bryan Wu9/14/2022 12:52 PM GMT+08  • 3 min read
UOB Kay Hian maintains 'overweight' rating for retail REITs sector; suburban malls 'fundamentally' attractive
Koh says that physical stores will remain relevant to consumers in the densely populated Singapore
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UOB Kay Hian analyst Jonathan Koh has maintained his “overweight” rating for retail REITs with downtown malls showing signs of recovery and increasing rent prices in suburban malls proving resilient and attractive.

With retailers now operating at full capacity and without restrictions since group size limits were lifted in April and masks no longer required indoors from last month, Koh says that e-commerce penetration has receded as consumer spending has picked up.

The pick up in consumer spending is also another positive for the sector.

Retail sales excluding motor vehicles grew 18.1% year-on-year (y-o-y) in July, marking the fourth consecutive month of double-digit growth. The retail sales index (RSI) also increased 10.4% y-o-y by volume after adjusting for inflation at 7.0%. On a seasonally adjusted basis, retail sales expanded 0.5% month-on-month (m-o-m), writes the analyst.

Apparel and footwear, department stores, watches and jewellery, cosmetics and healthcare and recreational goods registered double-digit growth of 68.3%, 42.9%, 41.7%, 25.5% and 16.9% y-o-y respectively.

Koh notes that the food and beverage (F&B) sector also generated strong growth of 41.9% y-o-y driven by lifted restrictions for restaurants and the return of large-scale events for food caterers.

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Meanwhile, online retail sales have normalised lower, with e-commerce penetration declining from its peak of 24.5% during the circuit breaker period in May 2020 to 12.7% in July 2022. “Physical stores continue to provide irreplaceable shopping touchpoints and experience. They remain relevant to consumers in the densely populated Singapore,” says Koh.

Since removing the requirement for pre-departure Covid-19 tests and fully reopening its international borders in April, visitor arrivals have increased 34% m-o-m to 726,601 in July, reaching 40.3% of pre-pandemic levels. Indonesia was the top source of arrivals, followed by India, Australia and Malaysia.

Koh believes that visitor arrivals will continue to recover with large-scale sporting events such as the Formula 1 Singapore Grand Prix in Sep and Tour de France Singapore Criterium in Oct. The return of meetings, incentive travel, conventions and exhibitions (MICE) activities, with more than 66 international events scheduled for the second half of the year, will also bring back business travellers.

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Together with the recovery of air travel and the return of more tourists in 2H2022, increasing numbers of office workers returning to downtown offices means that Orchard Road is expected to see “stronger recovery”, while suburban malls should see “modest recovery” for the period, having registered healthy growth in rent prices since 2021, says Koh.

To this end, the analyst believes that suburban malls are “fundamentally more attractive” with the gap in rent prices between Orchard Road and suburban malls continuing to narrow.

Suburban mall rent prices have maintained a gradual upward trend and increased 1.3% y-o-y to $30.20psf/month, while Orchard Road rent has stabilised at $34.20psf/month for the fourth consecutive quarter in 2Q2022, Koh points out. He adds that occupancy for suburban malls has improved 1.1% points y-o-y to 93.7% in 2Q2022 compared to its trough of 89.3% during the circuit breaker period in 2Q2020.

Koh believes that “limited” upcoming supply for retail space, with many projects experiencing delays in construction and no “significant completions” in 1H2022, could be a sector catalyst along with recovering shopper traffic and tenant sales with the easing of Covid-19-related

He has maintained “buy” calls for Frasers Centrepoint Trust (FCT), Lendlease Global Commercial REIT (LREIT) and Mapletree Pan Asia Commercial Trust (MPACT) with target prices (TPs) of $2.74, $0.99 and $2.22 respectively. Koh has also kept his “hold” call for CapitaLand Integrated Commercial Trust (CICT) with a TP of $2.34.

As at 12.51pm, unit prices in FCT, LREIT, MPACT and CICT are trading at $2.27, 80 cents, $1.89 and $2.09.

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