(Sept 2): Retailers appear to be exiting local shopping malls in droves, but the impact on the real estate investment trusts is probably limited. First, Giant hypermarket exited VivoCity earlier this year. Mapletree Commercial Trust (MCT) said in its 4QFY2019 (it has a March year-end) results announcement that it would be changing hypermarket operators at the mall. Giant would be replaced by Fairprice Xtra. Giant also exited Turf City in early August, to be replaced by HAOmart, and Giant at 10 Mile Junction was replaced by Sheng Siong. Elsewhere, Giant is a mini-anchor tenant at IMM, which belongs to CapitaLand Mall Trust (CMT), and at Suntec City, part of Suntec Real Estate Investment Trust

A Suntec REIT spokeswoman says
Giant’s lease at Suntec City continues to run. Cold Storage Holdings, Giant’s immediate parent, leases 46,000 sq ft of net lettable area at Suntec REIT, most of which is occupied by Giant. Neither is Giant a significant tenant at CMT, being present only in IMM, among its 15 properties. 

Giant is owned by Dairy Farm International Holdings. In its FY2018 annual report, the company said following a strategic review that a US$50 million ($69.4 million) impairment was made for Giant. “In Southeast Asia, our core issue rests within our Giant brand and particularly hypermarkets in Malaysia, Indonesia and Singapore. We have significantly underinvested in these hypermarkets in the past and they now need a course correction to reshape and resize our offering, to ensure it is fit… to meet the demands of modern-day consumers and keep pace with the rising middle
class,” Dairy Farm said. 

Metro department store — owned by Metro Holdings — is set to vacate The Centrepoint, a property owned by Frasers Property, and its space will be replaced by Decathlon. Metro is also a mini anchor at Paragon, the largest asset in SPH REIT.

High rents and more stringent regulations on tobacco and liquor also factors that drive away retailers. 

On Aug 27, DFS Group, part-owned by Louis Vuitton, announced that it did not bid to renew its concession, which expires in June 2020, at Changi Airport. DFS is not closing all its shops at once, though. “Our plan is to ensure a seamless transition as much as possible so that passengers are not inconvenienced. We don’t expect that all 18 stores will be closed at the same time,” says a Changi Airport Group (CAG) spokesman. The Moodie Davitt Report says Lotte Duty Free and The Shilla Duty Free of South Korea and Gebr Heinemann of Germany are bidding for the tobacco and liquor concessions. Shilla Duty Free also operates the cosmetics and perfumes duty-free concessions at Changi Airport.

During the budget announcement in February this year, Deputy Prime Minister and Minister for Finance Heng Swee Kiat announced a reduction in the duty-free alcohol allowance for returning travellers, from three to two litres, to be implemented from April. From July next year, tobacco products sold in Singapore must have plain packaging and enlarged graphic health warnings. Moodie Davitt attributes DFS Group’s departure from Changi Airport to the lower allowances. 

According to CAG’s FY2018 annual report, concession sales rose 10% y-o-y to $2.5 billion. In the same period, airport concessions and rental income of $1.3 billion made up 50% of CAG’s revenue of $2.6 billion. CAG owns 51% of Jewel Changi Airport. 

Changi Airport is not the first high-profile airport concession that DFS Group has exited. In 2017, DFS Group lost out in its bid to renew its concession at Hong Kong International Airport, to a China Duty Free Group and Lagardere Travel Retail joint venture.

Diversified portfolio, tenant base protect REITs

So far, the locally focused retail REITs appear unaffected by Giant’s possible exit from the local market. For instance, CMT has about 2,800 leases and around 30% of these are renewed each year. There is only one Giant supermarket, whose lease is ongoing. Cold Storage Holdings is a major tenant accounting for 2.4% of gross rental income, followed closely by NTUC Enterprise, which operates the Fairprice supermarkets, with 2.2% of GRI. Its largest tenant is RC Hotels, with 3.3% of GRI, followed by Temasek Holdings with 2.9%. 

As at March 31, MCT had 354 leases in VivoCity alone. The REIT de-risked its portfolio significantly when it acquired Mapletree Business City (MBC) I in 2016, lowering the contribution to net property income from VivoCity to 46.7%. In 2011, after its IPO, VivoCity contributed 75% to NPI. 

Yields have compressed at MCT because it is seen as a play on the Greater Southern Waterfront. Four of its five properties are located in the vicinity. In addition to Vivo-City, MCT owns Merrill Lynch Harbour-Front, PSA Building and MBC I in the Greater Southern Waterfront area. 

MBC II, a pipeline property, is valued at $1.345 billion, or $1,152 psf based on a capitalisation rate of 5%, according to a recent UOB Kay Hian report. If MCT acquires MBC II, it would be distribution per unit (DPU)-accretive. “We estimate the acquisition of MBC II would raise pro forma 2020 DPU by 2.8% to 9.65 cents,” UOB Kay Hian says. Accretion would be based on a 50:50 debt and equity mix, with MCT raising $672 million through an issue of 350 million new units, the UOB Kay Hian report suggests. 

An acquisition would provide investors with an entry point into MCT, which is trading at very compressed yields. Its DPU for 1QFY2020 ended June 30 was 2.31 cents, giving an annualised DPU of 9.24 cents. MCT last traded at $2.19 cents, or a yield of just 4.2%.

CMT’s DPU for 2QFY2019 was 2.92 cents or 11.68 cents on an annualised basis. Funan, which opened on June 28, is unlikely to contribute this year as a result of opening costs. CMT is trading at a yield of 4.44%.

Frasers Centrepoint Trust, often viewed as the most defensive retail REIT because of its suburban properties is trading at a yield of 4.46%. An additional boost for FCT is its likely inclusion in the FTSE EPRA NAREIT Developed Asia Index during the review this month. FCT has a free float of market capitalisation of more than $1.9 billion, which should be sufficient for the REIT to qualify for inclusion into the index. As at June this year, the free float market cap requirement was around US$1.25 billion. The requirement is a moving target for local REITs and companies aiming for inclusion, depending on the level of the index and the US dollar. 

Notably, the Singapore dollar has weakened against the US dollar by 2% this year, and is expected to weaken further in October when the Monetary Authority of Singapore is likely to ease policy and recalibrate the level of the Singapore dollar towards the mid-range or lower part of the nominal effective exchange rate band. 

Despite the disruption from e-commerce, and restructuring among some retail operators, retail REITs are viewed as among the most defensive REITs in Singapore. In addition to defensive portfolios, CMT, MCT and FCT are viewed as having strong sponsors and managers whose interests are aligned with those of unitholders, with sponsors supporting equity raisings. In addition, all the properties are in Singapore, removing foreign currency risk and interest rate risk.

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