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Sasseur REIT poised to capitalise on long-term growth of China outlet business

Emelia Tan
Emelia Tan • 8 min read
Sasseur REIT poised to capitalise on long-term growth of China outlet business
The REIT is supported by its sponsor Sasseur Group. It also leverages the extensive networks of the sponsor’s strategic shareholders, namely L CattertonAsia and Ping An Real Estate.
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SINGAPORE (Mar 27): Sasseur REIT is Asia’s first listed outlet mall REIT, with an initial portfolio comprising four retail outlet malls in China (in Chongqing, Bishan, Hefei and Kunming), offering investors the opportunity to invest in the country’s fast-growing retail outlet mall sector. The REIT is supported by its sponsor Sasseur Group. It also leverages the extensive networks of the sponsor’s strategic shareholders, namely L CattertonAsia and Ping An Real Estate.

What is Sasseur REIT’s take on the outlook for 2020, taking into account the economic disruption from the impact of Covid-19 on China and globally?

We believe that the impact of the Covid-19 outbreak on our outlet business is for the short term. As the situation improves in China, businesses are promptly resuming operations to cater to the returning consumers.

China’s long-term outlook remains positive and the spending power of the middle-income class that underpins the strong growth of the outlet business in China will continue to grow. Hence, we believe that Sasseur REIT remains well-positioned to capitalise on the growth of the outlet business in China in the years ahead.

We are pleased to announce encouraging first-day opening sales (on March 17) from our four outlet malls (up 129% y-o-y). These malls were closed in late January for 44 to 49 days in an effort to control the Covid-19 outbreak in China, and it is now business as usual for them.

In addition, Sasseur Group has actively planned and rolled out a range of marketing and promotional events to increase foot traffic.

We note strong pent-up demand given the opening sales. Engagement with shoppers through online platforms, which was stepped up during the closure, will also continue.

What are some notable developments that Sasseur REIT’s unitholders can look forward to?

Sasseur REIT has outperformed its projections for six consecutive quarters since its IPO in March 2018. Distribution per unit (DPU) exceeded forecast and projections by 12.6% and 4.7% in FY2018 and FY2019 respectively. In FY2019, Sasseur REIT was the top-performing China-focused S-REIT, with a total return of 52%. In December 2019, Sasseur REIT has also been included in the FTSE EPRA Nareit Global Emerging Index. We look forward to enjoying higher visibility and trading liquidity from institutional investors through this index inclusion. In recognition of its performance and investor relations efforts, Sasseur REIT has also received eight awards.

How has the portfolio evolved since IPO till date?

The IPO portfolio consists of four outlet malls located in Chongqing, Bishan, Hefei and Kunming. In April 2019, we made our maiden acquisition of additional retail shop units in Hefei Outlet, increasing our ownership from 77.8% to 81.2% of the property’s total gross floor area. With a low gearing ratio of 27.8% (one of the lowest across S-REITs), we will continue to look out for yield-accretive acquisitions that fit our investment mandate.

We are also embarking on asset enhancement initiatives for Chongqing and Hefei outlets. For Chongqing Outlet, we will focus on aesthetic and landscaping initiatives to re-create Chongqing of the late 1980s. Hefei Outlet will see some tenancy realignment to promote a sports theme in one of the malls and build a new pedestrian walkway linking the malls.

Fashion, sports and international brands account for over 75% of your revenue.

How do you expect to compete with a rising trend in e-commerce?

We believe that our outlets have several competitive advantages over e-commerce, such as:

1. Stricter enforcement of authenticity controls over products sold: Merchants found selling counterfeits at our outlet malls will face a penalty of 10 times the value of the product, while consumers will be compensated by the

same amount.

2. Non-overlapping product segment: The average value per transaction on e-commerce platforms is approximately RMB200 ($41), versus RMB1,000 at our outlet malls.

3. Lower sales commissions for merchants: Merchants pay average sales commission of about 20% on e-commerce platforms versus 10-16% commissions on sales as rental at our outlet malls.

How does Sasseur REIT intend to grow tenant occupancy rates across the outlets?

We have a healthy and consistent average occupancy rate of 96%, and expect this to continue given strong demand by brands to clear their inventory through outlet malls. The “sellthrough rate” in China for many brands has fallen over the years as a result of competition. We believe Sasseur’s brand reputation as a leading outlet operator in China commands high demand for its outlet space. Our outlets have a unique business model – we collect rent only in the form of commission from most of our brand tenants (with zero base rent). Therefore, sales is a more appropriate performance metric versus occupancy rates. We believe this is what sets Sasseur REIT apart from other REITs – to further align its interests with that of its tenants.

Although tenants pay rent as a percentage of sales, we have adopted the Entrusted Management Agreement (EMA), which receives fixed and variable components as rental income: Fixed income component (about 70% of the EMA income in the first year) provides a base and downside protection for our investors. Contractually, the fixed income component grows at 3% annually. Variable income component (about 30% of the EMA income in the first year) is pegged to the sales of the outlets, providing investors with potential upside exposure through the sales growth of our outlets.

What are some of your brands and tenants in your portfolio?

Some of our most popular brands include Coach, +39 Space (with Prada, Dior, Gucci and other luxury Italian brands), FILA, Adidas, Nike, and Polo Sport. Our outlet malls also offer lifestyle activities such as the MatataZoo in Heifei Outlet, providing entertainment for families. We constantly review our tenant mix in order to engage customers more holistically, and position our outlet malls as more than just a shopping destination.

What are the plans for the four properties that are due to open in 2020 and 2021 by the Sponsor?

These properties will be operated by our Sponsor, Sasseur Group. In our view, we enjoy a strong pipeline of potential properties operated by our Sponsor – these consist of 11 outlet malls in China, including the four new properties located along the more affluent coastal cities of Shenzhen, Xiamen, Yangzhou and Shanghai.

The current properties under management by our Sponsor include two ROFR (right of first refusal) properties and five pipeline properties. ROFR properties give us priority when our Sponsor decides to sell them. Pipeline properties are owned by third party but operated by our Sponsor, and hence will be ROFR properties for us if our Sponsor (which has priority) acquires them. Potential acquisition targets will be considered as and when it is deemed appropriate by the REIT.

Can you tell us more about your Sponsor, Sasseur Group, and its background?

Sasseur Group was founded by Vito Xu in 1989 and is now one of the leading outlet mall operators in China. With its vast operational experience, brand resources and deep understanding of the local market, Sasseur has a unique competitive edge in outlet businesses. In 2008, Sasseur’s first outlet was established in Chongqing. Since then, the group has expanded to operate 11 outlet malls (at end-2019).

The Sponsor Group leverages its founder Xu’s passion for art and culture in the development and design of its outlet malls, offering a unique lifestyle experience for its customers.

Sasseur Group is supported by its two important strategic shareholders: L Catterton Asia, a private equity fund partnership between L Capital of the LVMH Group and Catterton of the US; and Ping An Real Estate, an affiliate of Ping An Insurance.

There was a 93% increase in VIP members to 1.585 million in 2019. How important are VIP members and what does this mean for the business?

Our customer base comprises mainly local residents and about 50% of our VIP members visit the outlet mall once a month, contributing to over 50% of sales. We enjoy strong customer loyalty as a result of our strong brand reputation and the experience of our Sponsor in the fashion retail business.

What is Sasseur REIT’s value proposition and what do you think investors may have overlooked about its business?

Sasseur REIT offers investors exposure to China’s growing outlet mall business, one of the country’s fastest-growing retail segments, supported by increased spending power of middle-class Chinese consumers.

Outlet malls in China are projected to become the largest globally, exceeding that of the US by 2030.

Sasseur outlet malls are designed as lifestyle shopping destinations – we have an indoor zoo, children’s playgrounds, sports concepts and activities within the mall to provide all shoppers with a unique and enjoyable lifestyle and shopping experience, to complement value-for-money purchases of branded products.

Our unique EMA income model provides a stable fixed income component that grows at 3% annually, providing downside protection in unexpected situations and disruptions, such as the ongoing Covid-19 outbreak that led to the temporary closure of our outlet malls. The EMA also has a variable income component that is pegged to sales of our outlets, offering potential income upside.

Emelia Tan is a research analyst at SGX.

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