SINGAPORE (Aug 6): Frasers Centrepoint Trust’s portfolio of suburban malls remains relatively resilient. Its distribution per unit of 3.053 cents for its third quarter to June 30 was 1.8% higher y-o-y, and also the highest for a third quarter. Nine-month DPU was 9.153 cents, up 2.5% y-o-y.
Net property income for 3Q rose 13.7% y-o-y to $35.01 million. It was largely underpinned by a surge from Northpoint City North Wing, which benefited from a second full quarter after significant asset enhancement initiatives (AEIs) that were completed last September to integrate it with North Point City South Wing, owned by Frasers Property. Northpoint City North Wing’s NPI, which includes that from Yishun 10, rose 59.8% to $10.4 million for 3QFY2018.
Yishun 10 is adjacent to Northpoint City North Wing. FCT acquired 10 strata units at Yishun 10 for $37.8 million in 2016. At some point, FCT could integrate Yishun 10 into a larger Northpoint City North Wing and increase their net lettable area (NLA).
According to Chew Tuan Chiong, CEO of FCT’s manager, Northpoint City North Wing experienced strong tenants’ sales growth and the occupancy is expected to improve to around 97% from 92.5% currently.
The other mall that did well was Changi City Point, whose NPI rose 22.2% y-o-y to $4.29 million for the quarter. Changi City Point’s performance improved over the past six months following the opening of the Downtown Line. It is now situated at an interchange station. The mall’s occupancy continued to improve during the quarter, vindicating Chew’s plan to position it as an F&B and outlet mall. He admits, however, that the property may face challenges next year. “The moment Jewel opens, there will be some volatility. That’s the wave we have to ride through to understand the impact.”
Changi Jewel, which is 51% owned by Changi Airport Group and 49% by CapitaLand, is likely to open in the first half of next year. It will be connected to the MRT and the airport.
FCT owns six malls valued at $2.7 billion. Its portfolio appears more resilient than that of CapitaLand Mall Trust because three of the properties are located at MRT stations in HDB heartlands with large catchment populations. The other two heartland malls — apart from Northpoint North Wing — are Causeway Point and YewTee Point. “We expect FCT to be less impacted than CMT. FCT’s whole portfolio is in suburban areas, which are more resilient to fluctuations in retail spend since the malls cater to residents living in nearby housing estates,” states a Moody’s Investors Service report dated July 31.
There is, however, concentration risk. Causeway Point contributed around 47.5% to NPI in 3QFY2018, followed by Northpoint City North Wing with 29.5%. YewTee Point contributed 6.7%. Changi City Point is styled as an outlet mall with F&B offerings catering to the business park crowd at Changi Business Park.
More AEI planned
Causeway Point is key to FCT. On July 24, during a results briefing, Chew announced that an underground pedestrian link to connect Wood Square with the basement of Causeway Point is being planned. Wood Square is an office building across the road from Causeway Point. FCT has earmarked $15 million to pay for its share of the link. Work is likely to start next February and be completed in December.
“We are happy to build this extension because it will bring the office workers into the mall before they emerge at the MRT station,” Chew says. “This is a 24-hour link; we have to provide a 7m access. As a result, the configuration in the basement will have to be modified. Some existing tenants have to vacate.”
However, Causeway Point will be compensated by additional gross floor area. “We have the ability to expand some of the areas on the other floors, for example the children’s play area, which can be taken back and enclosed and converted into shops,” he reasons.
When asked, Chew says a government land sale site on the confirmed list in the second half of this year in Woodlands near Causeway Point is unlikely to pose too much of a threat. In fact, it could draw more shopper traffic given the configuration. The retail area is likely to be only 28,000 sq m, less than half the size of Causeway Point, while future development would have a large component of office and residential units.
Twin threats of supply and e-commerce cast shadow
Whatever the case, retail supply could pose a threat to retail real estate investment trusts (REITs) in the near term. “A significant amount of new retail space will be added from 2018 to 2022, limiting the likelihood of a major recovery in rents, which have been weak since the third quarter of 2015. We expect stress on retail rents to continue because of landlords’ preference to maintain occupancy rates rather than increase rents,” says the Moody’s report.
According to the ratings agency, CMT is exposed to more volatility because almost half its revenue is from the city fringe. “CMT’s exposure to the city fringe and Orchard Road area is large, at 49%. Retail sales in the city fringe and Orchard area tend to be more volatile than retail sales in suburban areas that cater to the daily needs of the residents living in those areas,” Moody’s says.
CBRE, on the other hand, is more positive on Orchard Road. “Orchard Road space continued to display resilience as vacancy rates inched downwards to 5.6% in 2Q2018, the lowest in 14 quarters. This is possibly attributed to the lack of new supply introduced. At the same time, a growing tourism market will support the demand for Orchard Road space,” CBRE says.
FCT has a strong foothold in the north of Singapore where there are a limited number of competing malls, Moody’s indicates. However, both REITs have similar exposure to the east of Singapore at around 17% of revenue. Two large malls are going to be completed in the next year or so in the East — Paya Lebar Quarter with around 340,000 sq ft of NLA, and Jewel with around 576,000 sq ft of NLA.
The much-talked-about e-commerce threat may be receding a little. “The adoption of online retail in Singapore has been slower than in the US and the UK, among others, because of Singaporeans’ preference for physical shopping, Singapore’s small size and connectivity within the country, as well as the country’s position as a tourism and shopping hub in the region,” Moody’s observes. “Landlords have embraced technology to create different shopping experiences to draw shoppers to physical stores and keep foot traffic high,” the ratings agency adds.
Portfolio could be reconstituted
Waterway Point, which is one-third-owned by Frasers Property, is a pipeline mall for FCT. The mall is widely believed to have stabilised. Chew has also hinted that the manager is looking at options for Bedok Point — which has been underperforming for a few years — which could include a divestment.
Analysts are largely positive on FCT. Bloomberg’s poll shows 12 “buy” recommendations since its 3QFY2018 results, with just three “neutral” ratings. While its annualised DPU works out at 12.2 cents, Maybank Kim Eng is forecasting FY2018 DPU at 12.7 cents, up 7.3% y-o-y, versus consensus DPU of 12.2 cents. Consensus DPU forecast for FY2019 is 12.8 cents, up a further 4.9% y-o-y, translating into forward yield of 5.82%.
