SINGAPORE (Mar 31): Real estate investment trusts in the retail space could see a huge dent in their distribution per unit (DPU) for FY2020 as a result of Covid-19 and the, according to CGS-CIMB Research.

This comes after Singapore issued an advisory urging its residents to avoid making any non-essential visits to malls and supermarkets.

While malls will remain open, mall capacity has also been limited to one person per 16 sqm of usable space.

“The new measures will significantly reduce the density of crowds in the malls, including the suburban malls,” says lead analyst Eing Kar Mei in a flash note on March 30.  

“Based on our checks with the REITs, these measures will also impact urban malls, which have already seen large declines in shopper traffic and tenant sales,” she adds.

As part of the $48.4 billion Supplementary Budget announced on March 26, property tax rebates for retail malls were also increased to 100%.

“I strongly urge landlords to fully pass on the rebate to tenants, by reducing rentals, to directly ease the cash flow and cost pressures faced by tenants,” Deputy Prime Minister and Finance Minister Heng Swee Keat said in a Ministerial Statement in Parliament.

Following the announcement, some REITs have already swept into action.

For instance, CapitaLand will provide rental rebate of 1.5 months for its shopping mall tenants, on top of a 0.5-month rental rebate for the majority of its tenants that was announced earlier.

Mapletree Commercial Trust is committing an additional $18 million of rental relief in a second round of assistance to its retail tenants, on top of the $11 million in the first round.

Frasers Property Retail and Frasers Centrepoint Trust (FCT) will provide additional rental rebates amounting to $45 million for tenants, which is an extension of its Tenant Support Package announced in February.

According to to Eing, the tax rebate and extra rent rebate given by the REITs work out to around one to two months’ of rent.

“Based on our analysis, a two-month rent rebate given to 90% of the malls’ tenants plus 90% of variable income wiped out for nine months until year-end and 50% carpark income reduction will reduce REITs’ FY2020F DPU by 12-19%,” Eing says.

“Given the lower support granted to malls overseas, retail REITs with overseas presence will be in a worse position as compared to the local-focused mall under these circumstances,” she adds.

Despite the bleak outlook, the analyst highlights two retail REITs that are likely to weather the storm: CapitaLand Mall Trust (CMT) and FCT.

Eing notes that CMT is trading at just 0.88 times its price-to-book value, which is 1 standard deviation below its long-term mean.

“The enlarged post-merger entity will increase the stability of the REIT and put it in a stronger position for acquisitions,” says Eing.

CGS-CIMB has an “add” call on CMT with a target price of $2.75.

Meanwhile, the brokerage has an “add” recommendation on FCT with a target price of $3.10.

“While the new measures will also impact suburban malls, we believe FCT will be the least affected among the REITs given its pure exposure to suburban malls,” Eing says.

As at 4.18pm, units in CMT are trading 3 cents higher, or up 1.7%, at $1.78. Meanwhile, units in FCT are trading 6 cents higher, or up 2.8%, at $2.24.