In The Edge Singapore’s forum titled E-commerce, threat or opportunity? which was being held on Sept 19 in conjunction with the supplement, Celebrating 20 years of S-REITs, Adrian Chui, CEO of ESR-LOGOS REIT’s (E-LOG) manager; Kelvin Chow, CEO Lendlease Global Commercial REIT’s (LREIT) manager; and Geoff Howie, market strategist, Singapore Exchange (SGX), gave their views on e-commerce trends, interest rates, inflation, recession, sponsors and other challenges and opportunities. The forum was held at the SGX auditorium.
As Covid raged on in 2020 and 2021, LREIT acquired a 100% stake in Jem, a popular suburban mall linked to Jurong East Interchange, from funds managed and part-owned by sponsor Lendlease. The initial 3.75% stake was acquired in October 2020, 28.05% in September 2021 and the remaining 68.2% stake was acquired in February. Hence, out of the $4.24 billion of acquisitions made by S-REITs in the January to August period, $2.015 billion was due to Jem.
How does Chow view e-commerce? As he sees it, the landlord partners its tenants to help drive traffic and sales to its tenants. “Our marketing strategies help our tenants to improve their positioning and to strengthen their brand name. With physical shops, customers and retailers can have stronger interactions and a better customer relationship,” Chow says.
E-commerce has been something of a tailwind for industrial REITs. Their warehouses store goods before they are delivered either to the end-user or to a shop. “If e-commerce players are the equivalent of frontline soldiers because they are interacting with the clients, logistics assets are the backbone of the whole business because without us, you don’t get your final product, whether it is through e-commerce or at a shop,” Chui points out.
During the pandemic, warehouses and logistics assets were in demand for storing and moving FMCGs (fast-moving consumer goods) such as clothes and fashion accessories. By 2021, the focus had shifted to cold chain logistics, which simply refers to warehouses with temperature control, that can store semiconductor chips, pharmaceuticals, fruits, vegetables and meat, and vaccines.
“Because of the geopolitical situation, manufacturers are actually paying more attention to logistics. The last two years have resulted in a big secular change in the way we produce our goods and how we deliver our goods,” Chui says.
He adds that bottlenecks in production have resulted in manufacturers holding a lot more stock and placing more emphasis on logistics supply chains — from the warehousing of raw materials to production and holding on to the final product.
In addition, logistics is now digitalised and automated, making “live” tracking possible. “Technology and digitalisation have made logistics operations very efficient,” Chui says.
On the other hand, demand from e-commerce players has eased. In fact, e-commerce players such as Shoppee are shedding staff. “Demand for logistics facilities for e-commerce is coming down as economies open. The pendulum is shifting to manufacturers and producers, with warehouses and cold storage facilities in demand,” Chui says.
Impact of inflation, rising interest rates
Following a decade of low interest rates, the US Federal Reserve has turned hawkish. From just 25 basis points in Dec, the spate of Fed hikes this year — 50 bps in March, 75 bps in June, a further 75 bps in July, and 75 bps in September — has taken the US Federal Funds Rate to 3.25% to 3.5%.
As he tells it, his investors are concerned about the impact of higher utility costs and interest rates on DPU. “We are able to pass through 95% of our utility bill to our tenants. We leave utilities to the tenant for them to use. Inflation also affects maintenance and cleaning costs and we have gradually raised our service charges to offset that,” Chui says.
Now, investors are concerned about recession, he indicates. The surge in policy rates by central banks is likely to cause demand to fall, according to Chui.
For LREIT, employment numbers are still buoyant, and shoppers are still flocking to the malls after the long lockdown. “Statistics on employments actually has been better than expected, but higher costs are really a challenge on business,” Chow acknowledges.
Lendlease plans net zero by 2025, absolute zero by 2040
Lendlease, which is LREIT’s sponsor, has ambitions and aggressive targets to reach net-zero carbon emissions by 2025 and “absolute-zero” carbon emissions by 2040. By 2025, Lendlease will reduce greenhouse gas emissions as far as possible, with the remainder offset in an approved carbon offset scheme, for its Scope 1 & 2 emissions. These are the group’s direct emissions from operations, like petrol, diesel, and gas that power fleet vehicles, generators, hot water systems and boilers.
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The carbon the group indirectly emits is also something being considered in the net-zero and absolute-zero targets. These emissions are generated in upstream activities such as the manufacturing of building materials, or downstream activities such as emissions from business travel, tenant power consumption or transporting materials.
One of the ways Lendlease gets to net zero and then absolute zero is to switch to renewable sources of energy where possible and lower its fossil fuel consumption. This has pressured LREIT, in a good way, to be energy efficient and to lower its own energy consumption.
“We have to make ourselves more efficient in order to be in the position to get to our target of net zero,” Chow says. “Some of the actions we take put us in an advantageous position when it comes to sustainability.” However, there are upfront costs. “Most importantly, we must manage our topline as we aim for cost savings in our operations and distribution to investors will be stable,” he adds.
Howie highlights the various risks that investors, including REIT investors, face. There are two major geopolitical risks — the war in Europe and the China-Taiwan-US triangle in Asia.
REITs trade at a yield spread above risk-free rates — which are yields of 10-year bonds. This yield spread of S-REITs averaged 390 bps–400 bps in the past 10 years. In the US, yields on the 10-year treasuries have more than doubled from 150 bps to 350 bps in a year, since September 2021. Yields on 10-year Singapore Government Securities have risen steadily from 1.59% in September 2021 to more than 3.22% as at Sept 16. S-REITs need their DPUs to rise to higher levels to maintain the yield spread, or REIT unit prices could fall to reach these yields.
“These are high-frequency numbers in highly fluid circumstances that create trading opportunities for investors in the REIT market. Of course, you’ve got very different performances across the various sub-segments. Logistics and industrial REITs have been the best-performing asset class across the world for the last 10 years according to Cushman and Wakefield. This year, if you look at the REIT market, globally, the FTSE REIT Index is down, and global REITs are down. But our hospitality REITs have given superior returns and that has all been due to the reopening momentum. So you have elements of vibrancy according to the economic momentum that is really uneven,” Howie explains.
All these forces that make S-REIT prices rise and fall also make the market exciting and provide investors with trading and investing opportunities.