Retail REITs were among the sectors most badly affected by the Covid-19 pandemic in 2020. But the tide seems to have turned. With our economy on the mend, retail REITs are now among this year’s top performers.

Malls may also have to brace themselves as the COVID-19 situation remains unpredictable. Singapore will enter into a period labelled Phase 2 (Heightened Alert), which will take effect from May 16 to June 13 after new infection cases spiked. As we head into the second half of 2021 and beyond, here’s what might be ahead for retail REITs.


SEE:ESR-REIT announces acquisition of Singapore and Australian assets, AEIs, and $150 mil equity fund raise


Singapore’s retail REITs landscape

Retail REITs have long been a popular choice for REIT investors. After all, you can simply head down to a mall to assess its footfall, retail offerings and amenities to gauge the performance of the REIT that manages that mall.

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Singapore’s retail REITs typically own and manage retail real estate, such as suburban malls and, or central region malls. For instance, Frasers Centrepoint Trust (FCT) is one of the largest suburban retail mall owners in Singapore with malls like Causeway Point and Hougang Mall under its portfolio.

Starhill Global REIT, another retail REIT in Singapore, operates mainly malls mainly in the central region such as Wisma Atria and Ngee Ann City.

CapitaLand Integrated Commercial Trust (CICT), on the other hand, owns both suburban malls (such as Junction 8 and Tampines Mall) and malls located in the central region (such as Raffles City and Plaza Singapura).

Retail sales pick up

Since late last year, we’ve seen a gradual recovery in retail sales as Singapore entered into Phase 3 of Covid-19 reopening.

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While the food & beverage sector continues to be constrained by capacity limitations, apparel and footwear retailers posted a 32% increase year-on-year (y-o-y) in February during the Chinese New Year period.

See: Singapore retail sales grow 5.2% y-o-y in February on CNY celebrations

Demand for these sectors was also given a boost in March as employees were getting ready to return to their offices, when the Singapore government announced that the work-in-office cap would be raised from 50% to 75%.

See also: Singapore retail sales grow 6.2% y-o-y in March, boosted by higher y-o-y sales in watches & jewellery

But given that work from home is now the default for the Phase 2 (Heightened Alert) period and social distancing rules have been further tightened in light of rising Covid-19 cases, malls could again face lower footfall and lower tenant sales in May and June. This setback notwithstanding, domestic retail spending is still poised to recover in the medium term. Consumers are likely to spend more at local malls since mass travel is currently all but impossible.

If new infection cases are brought under control following tighter measures, it is possible that further easing of safe distancing measures may resume in the second half of the year. Alongside the steady roll-out of Singapore’s vaccination programme, this could bode well for retailers and further support the performance of retail REITs.

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Lower rental reliefs should improve revenue

Many retail REITs experienced lower revenue and net property income on the back of rental rebates and other relief measures provided to their retail tenants in 2020.

With a stronger economic outlook this year, fewer tenants should require such rebates. According to CGS-CIMB Research, while most landlords will continue to offer rental rebates to struggling tenants, the quantum will be much reduced compared to last year. Rental relief will likely be offered on a more targeted basis, such as for cinema tenants operating at significantly reduced capacity.

Lower rental reliefs and the recovery of shopper traffic and tenant sales in the months ahead should translate to distribution per unit (DPU) increments. So far, 14 REITs have reported their earnings for the first quarter of 2021 (as at May 3) and averaged DPU increases of 31% year on year.


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Retail rents likely to hold steady

Another positive for retail REITs is that Singapore’s future retail supply remains low compared with the 5-year average of preceding years. This suggests that rents will likely remain stable in the immediate future.

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Will central malls play catch up?

With most people working from home in 2020, suburban malls naturally outperformed their centrally located counterparts. Suburban malls, particularly those connected to transport hubs like MRT and bus stations, generally see residents go through the mall every day as they go about their activities. This generates stable footfall and resilient tenants sales.

While many residents will frequent nearby malls for food and necessities, fewer are likely to patronise central malls that regularly. Central malls also tend to cater more to tourists, which all but dried up in the midst of the pandemic.

That said, the gradual return of the office crowd should improve the outlook for central malls. If proposed air travel bubbles with Hong Kong, Australia and Taiwan do take off later this year, this will mean a significant boost for tourist-focused malls as well.

Omni-channel retail: The new normal?

Covid-19 undeniably took a huge toll on many retailers. In 2020, we bid farewell to several high-profile retail brands such as Robinsons, Topshop, and Esprit.

One silver lining is that several retailers have swiftly taken over the prime retail space vacated by Robinsons. We now have IKEA at JEM, BHG at Raffles City and Courts at The Heeren. While some brands may exit, more resilient retailers have proved ready to fill vacated spaces with new concepts.

This speaks to how brick-and-mortar retail will remain relevant even as e-commerce grows in popularity. Going forward, consumers are likely to indulge in both online and physical shopping depending on their needs and preferences.

There are encouraging signs that landlords recognise this and are keeping up with the evolving retail landscape by introducing omnichannel experiences to strengthen the relevance of their malls.

For instance, CapitaLand, which manages CICT, launched its digital mall offering, eCapitaMall, as well as its food ordering plat Capita3Eats (a food ordering platform) in 2020 to augment the online to offline experience for their shoppers and retailers.

FCT adopted a similar strategy with its Frasers eStore and Makan Master digital platforms. These platforms provide multiple fulfilling options (in-store, click & collect and delivery) and order stacking as well.

Well-located and well-managed malls thrive

Ultimately, the success of retail REITs depends on how well-located and well-managed their malls are. While short-term hiccups may occur, such as the newly mandated decrease in mall capacity and dining group size, high quality malls will always be able to attract new tenants and keep shoppers coming back. These tend to be managed by the brand-name REITs like CICT, Mapletree Commercial Trust, and FCT.

For consumers looking to invest in retail REITs, a diversified portfolio across different REIT sectors may be a smarter way to invest, moving forward. As the old saying goes, don’t put all your eggs in one basket.

Our advice? A diversified REIT portfolio, like an S-REIT ETF, or Syfe REIT+, is less sensitive to market swings or developments that may affect particular sectors.

Richard Yeh is the head of portfolio construction and risk management at Syfe