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What inflation? Shoppers out in force and boosting retail REITs

Samantha Chiew
Samantha Chiew12/22/2022 09:46 AM GMT+08  • 8 min read
What inflation? Shoppers out in force and boosting retail REITs
Department of Statistics data shows that total retail sales in Singapore gained 10.4% y-o-y for October, coming in at $4 billion. Photo: Albert Chua/The Edge Singapore
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Singaporean consumers continue to spend, even as worries of soaring prices loom. There may be some good news: The Monetary Authority of Singapore (MAS) says global inflationary pressures may have peaked, and given the city-state’s open economy, inflation in 2023 is still seen to be higher than the historical average. MAS also expects the pace of economic growth to slow further in 2023 as pent-up demand from the economic reopening dissipates, and external demand for Singapore’s key electronics exports fades.

“While growth in the economy should continue to be supported by expansions in the domestic-oriented and travel-related sectors, the pace of discretionary spending is likely to moderate as high inflation and the uncertain economic environment dampen consumer sentiment,” says the central bank in its biannual macroeconomic review on Oct 27. MAS adds that discretionary spending in Singapore remains strong and could significantly contribute to inflation.

According to the Department of Statistics (Singstat), total retail sales in the republic gained 10.4% y-o-y for October, with the total sales value coming in at $4 billion, of which 13% of sales were from online. Excluding motor vehicles, retail sales were up 14.3% y-o-y at $3.6 billion, of which 14.5% were online sales. The increase in retail sales was partly attributed to larger growths in industries such as clothing and footwear, food and alcohol, department stores, watches and jewellery.

For example, the recent Black Friday and Cyber Monday sales saw consumers descend into the Orchard Road shopping district in search of deals. While many were bargain hunting, some were stocking up before the impending goods and services tax (GST) hike next year.

Alice Yeung, sales and marketing director of logistics firm J&T Express Singapore, says the e-commerce landscape has dominated the retail space over the past two years, as the pandemic was still high. But with the easing of restrictions to almost pre-Covid-19 levels, the balance between online and offline shopping has once again been tilted.

“More consumers are moving back to bricks-and-mortar stores to immerse themselves in the offline commerce experience; I think the ‘new normal’ in 2023 will revolve around an omnichannel shopping experience where both online and offline stores will meet different consumer needs,” says Yeung.

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Retail outlook

From the crowds on Orchard Road and the large shopping bags, it is clear that Singapore’s shopping spirit remains strong, especially amid the festive season. Is this the much-needed reprieve that Singapore’s retail real estate investment trusts (REITs) need?

RHB Singapore analyst Vijay Natarajan says 2023 may be a challenging year for the retail industry. “We are cautious on our 2023 outlook for Singapore’s retail sector as a confluence of headwinds such as weaker economic outlook, inflationary pressures and increase in GST weigh on the sector,” adds Natarajan, who covers real estate and REITs. “The balancing factor, though, is the steady increase in visitor arrivals, with the possibility of China opening up its economy. Overall, we expect sales for retail REITS to see a modest, low, single-digit growth next year.”

See also: Foreign REITs continue to face challenges

RHB’s senior economist Barnabas Gan expects retail sales to continue their positive momentum in 4Q2022, forecasting retail sales growth of 10% y-o-y in 2022, with the balance of risk tilted to the upside. “Before the GST rate hike to 8% effective Jan 1, 2023, some front-loading expenditure behaviour should also help the retail sales environment before year-end. Macroeconomic-wise, Singapore’s retail climate will continue to benefit from the relatively tighter labour market and the gradual reopening of Asia’s borders.”

He expects retail sales momentum to slow in 1H2023, as he expects retail sales growth to come in at 4% to 6% in 2023. “We expect Singapore’s economy to slow into 1H2023 given the global economic headwinds. As such, we will not be surprised if retail sales see several months of contraction on a y-o-y basis in 1H2023,” says Gan.

Similarly, Maybank Securities believes that inflation and rising GST will dampen retail sales growth. The research team at Maybank Securities say that Price-sensitive consumers may dial down on some of their discretionary spendings. “The offsets are likely to be rising real wages of the resident population, the influx of high-earning foreign nationals, growing tourist arrivals and wealth effect from record property prices and cumulative wage growth over the last decade.”

DBS Group Research expects the strong rebound in the retail industry in 2022 to see a slower momentum in 2023, along with sticky inflation and slower economic growth prospects, and weight on consumer confidence. “Our analysis of the performance during the past four recessions (over 1997 to 2022) generally saw a 13% to 19% peak to trough dip in the general retail index with sectors focused on necessity spending showing relative resilience,” add DBS analysts Geraldine Wong, Derek Tan and Andy Sim.

“Our recent consumer survey indicated that consumers will ‘stretch their dollar’ and focus on essential goods, highlighting our confidence that essential goods will outperform in the face of economic adversity,” say the DBS analysts, while observing that retail subcategories such as “food courts and cafés, fast food and minimart and convenience stores” showed the smallest volatility and lags the decline in retail sales by about two quarters through past downturns. The analysts add that amid the higher cost of living and mortgage, consumers are likely to tighten their wallets, prioritising spending on necessities over discretionary goods.

Slower economic growth

RHB’s Natarajan keeps a “neutral” outlook on the retail S-REITs, on the back of rising rates, staffing constraints and inflationary pressures. “Consumers are likely to cut back on their discretionary spend and prioritise spending allocation to necessities.” He adds that suburban malls typically have a higher proportion of essential services in their trade mix and are thus more resilient in an environment of slower economic growth and higher inflation. “Economic reopening and resumption of travel have shifted some of the demand out of suburban malls to downtown malls, which in turn, has seen a sharper recovery this year, but we expect suburban malls to remain resilient and positively benefit from an evolving hybrid working model.”

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RHB’s top pick within the retail S-REIT space is Starhill Global REIT (SGREIT), where it has kept its “buy” call and has a target price of 60 cents on the counter. “We like SGREIT on valuation grounds and view it as a key beneficiary of increasing tourist arrivals. The Thomson East Coast Line (TEL) opening is expected to draw more foot traffic and sales to orchard malls. Among suburban malls, we have a ‘neutral’ call on Frasers Centrepoint Trust (FCT),” says Natarajan.

Maybank Securities says 2023 will be a challenging year for all REITs, as rising rates will negatively impact them. However, REIT managers have been proactive in extending debt maturity and raising hedge ratios. “In addition, growth in tenant sales will also help turnover rents. REIT managers may have to continue to refresh tenant and trade mix in line with changing consumer demands and take-up of new concepts.”

It also notices that suburban malls benefit from the catchment, located next to transport nodes and facilitating necessity shopping. “Managers will have to refresh offerings for shoppers as some of the previous anchors reassess space requirements. Growth is likely to be higher for non-suburban malls as they are still operating below pre-pandemic levels, and tourist and high-end consumers continue to grow,” notes the research team.

Maybank Securities has a “buy” call and $2.80 target price on FCT, as it believes it is a play on stable domestic consumption. “We expect resilient labour markets and cumulative wage growth through the years to underpin retail sales,” says the research team.

The brokerage has a “buy” call and a $2.55 target price on CapitaLand Integrated Commercial Trust (CICT). Apart from its high environmental, social, and governance (ESG) assessment scoring, the research team believes that the trust is a proxy for Singapore commercial real estate, a beneficiary of reopening, return to the office and resilient domestic consumption.

Still, DBS believes that suburban retail landlords are proxies for necessity spending. “The suburban retail landscape will continue to deliver resilience in the face of economic uncertainty as consumer purchasing substitution will shift spending toward essential items, which are key exposures for landlords like FCT and Lendlease REIT (LREIT) with their purer exposure in the suburban landscape,” it adds. Both stocks yield an attractive forward FY2023 yield of 6.4% and 7.3%, respectively, and are offering yields close to multi-year highs. DBS also likes CapitaLand China Trust, as the analysts believe China’s reopening is the “trump card” for retail in 2023, as pent-up travel demand could fuel the next boost.

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