SINGAPORE (Dec 24): The Chinese retail real investment trusts have had a challenging 2018. CapitaLand Retail China Trust, which started the year at $1.62, was trading at $1.38 as at Dec 17. Sasseur REIT, which was listed earlier this year at an IPO price of 80.5 cents, is down 18% to 66 cents. Interestingly, BHG Retail REIT, which had been underwater compared with its IPO price of 80 cents in 2015, rebounded after the announcement of an acquisition.
BHG Retail REIT is acquiring Hefei Changjiangxilu Mall for the equivalent of $65.7 million (excluding expenses and fees). The agreed value implies a FY2017 net property income yield of 5.2%, which is higher than the 5% NPI yield of its Hefei Mengchenglu Mall. Since BHG Retail REIT’s gearing was 32.7% as at Sept 30, 2018, the acquisition is fully debt-funded. According to an announcement, the acquisition is accretive. The pro forma distribution for 1HFY2018 would rise to 2.75 cents from 2.74 cents. Units in BHG Retail REIT closed at 70 cents on Dec 17, up from a low of 64 cents on Nov 14. The acquisition was announced on Nov 6, giving investors time to digest the positive impact of the property on the REIT’s portfolio.
CRCT’s rental reversions surge in 3QFY2018
CRCT has been consolidating its portfolio and focusing on organic growth, following the acquisition of a 51% stake in Rock Square in Guangzhou (CapitaLand holds the remaining 49%) and divestment of CapitaMall Anzhen, both in 2017. It now owns nine malls, with 61% of NPI from Beijing, 13% from Guangzhou, 12% from Chengdu, 6% from Shanghai and the remaining from Tier-2 cities.
For 3QFY2018, CRCT announced that portfolio shopper traffic rose 19.6% y-o-y, tenant sales psm per month rose 4% y-o-y, and rental reversions were 12.1% over the last rental rates. The positive rental reversions were led by Xinnan (up 35.6%), Rock Square (up 28.3%), Minzhongleyuan (up 11.1%) and Wangjing (up 10.4%). The weighted average lease to expiry for the portfolio is 5.4 years by net lettable area and 2.9 years by gross rental income.
In a results review, JPMorgan says: “What we like about 3QFY2018 [is] four malls saw double-digit rental reversions, making for a third straight quarter of double-digit reversions. Notably, Rock Square’s third straight quarter of more than 20% reversion saw the introduction of 25 new brands to the mall, while Xinnan [in Chengdu] recorded its highest reversion, of 35.6%, on the reconfiguration of its food court and restroom into specialty NLA [net lettable area].”
JPMorgan is concerned, however, about the impact of a weaker renminbi on distribution per unit. “The 3.2% q-o-q decline in 3QFY2018 [RMB versus the Singapore dollar] was evident in a 6.6% q-o-q decline in net asset value to $1.55,” JPMorgan points out.
UBS is also concerned about the weakening RMB. It says 3QFY2018 DPU growth of 1.7% y-o-y to 2.41 cents was below its estimates. “The weaker currency of RMB4.95 to the SGD was the key drag compared with our RMB4.80 forecast. Otherwise, 3QFY2018 core operations were tracking in line with our expectations,” UBS says in an update.
JPMorgan forecasts DPU of 10.54 cents for this year and 10.7 cents for FY2019. As at Dec 17, CRCT was trading at forward yields of 7.64% and 7.75%.
Sasseur REIT’s EMA model not well understood
The standout for Sasseur REIT is the manager’s transparency. Asked why units in Sasseur had underperformed the Chinese retail REITs, a spokesman says: “Some investors are worried about the challenge that the Chinese economy is facing as well as the ongoing trade war. So, they sell off ‘Chinese’ stocks, although these risk factors actually don’t affect Sasseur REIT.” In addition, some investors still do not quite understand entrusted management agreement and, of course, investors are looking at more of a track record from the sponsor, a private Chinese company.
Most fund managers see outlet malls as a niche sector. Furthermore, Sasseur REIT’s malls are promoted as lifestyle malls, which include entertainment. They are located outside the city centres, in areas that have yet to develop.
Interestingly, in Julius Baer’s Wealth Report Asia 2018, the top price changes in the Swiss private bank’s luxury index — an indication of demand — were not for branded shoes, handbags and clothes sold in outlet malls. Rich Asians appear to be consuming boarding schools, universities, golf club memberships, pianos, residential properties and degustation dinners.
Above all, the concern with Sasseur REIT is the weakening of the RMB and its impact on DPU. “In principle, we would hedge the distribution ahead of time, but the management can have judgmental quality overlay, [depending on] the market [volatility] and hedging cost,” Sasseur REIT’s spokesman says, adding that Bloomberg’s consensus forecast is for the RMB to average 5.04 against the Singapore dollar, which is weaker than the average of 4.95 for 3QCY2018.
Havard Chi, head of research and director at Quarz Capital, says his fund is invested in CRCT because of its stable yield. He is anticipating DPU growth of as high as 5% a year until 2020, supported by positive rental reversions and, particularly, with the performance of Rock Square. Chi reckons he can make a total return of at least 15% by 2020.