Singapore’s retail real estate investment trusts (REITs) are in an unenviable position. Retail REITs might be enjoying a cyclical recovery from a rebound in tourism and a more constructive economic landscape, but analysts from Maybank Kim Eng believes that these are not enough to overcome the headwinds.
Rising rates, peak new supply in 2018 and fair valuations will be the first challenge for retail REITs in 2018. Following that, structural challenges from ecommerce continue to erode sales of retailers. Sales leakages from Singaporeans increasingly spending overseas also remain a structural concern.
Be Highly Selective For Retail REITs
For those who are looking to invest in the retail REIT sector, investors should be highly selective given the structural challenges. According to Maybank Kim Eng, the preference is for retail REITs to have these three characteristics:
1) Suburban malls near transport hubs, with large catchment populations and exposure to non-discretionary spending;
2) Exposure to prime Orchard Road rental recovery; and
3) Strong asset enhancement initiative (AEI) and recycling track records.
Investors Takeaway: Time To Sell Which Retail REITs
Given Maybank Kim Eng’s view that retail REITs are set to underperform the S-REIT sector, it seems like a good time to take profit on retail REITs while valuation is still rich.
CapitaLand Mall Trust
CapitaLand Mall Trust is S’pore’s largest retail REIT by far, with its sponsor CapitaLand ranked amongst Asia’s largest developers. Given retail headwinds and a weaker operating outlook, CapitaLand Mall Trust underperformed the S-REIT sector and STI in 2017. Concerns about negative rental eversions and surging supply in 2018 will continue to haunt CapitaLand Mall Trust share price. While valuation is now at its 15-year historical average, there is a of lack near-term catalyst for CapitaLand Mall Trust.
HOLD, TP $2.15 (current share price: $ 2.12)
SPH REIT’s share price has appreciated sharply since its debut in 2013. While SPH REIT is a strong proxy to growth in tourist arrivals and a recovery in prime Orchard Road rents, its valuation appears rich. SPH REIT is trading at peak valuations since its IPO, and forecasted yield for FY18 is only 5.2 percent. Currently, SPH REIT is trading at 1.1 times its book value and Maybank Kim Eng believes that its current valuation has largely priced in potential acquisition of Seletar Mall from its sponsor – Singapore Press Holdings.
HOLD, TP $1.00 (current share price: $1.07)
Mapletree Commercial Trust
Mapletree Commercial Trust has been consistently delivering value to its unitholders since 2011. Mapletree Commercial Trust has had the longest period of outperformance on the back of strong double-digit rental reversions at its key VivoCity retail asset. Mapletree Commercial Trust achieved 23 percent 6-year rental reversions at VivoCity, which helped it to grow its distribution per unit (DPU) at 4.9 percent CAGR from FY12 to FY17.
However, with growth tapering from structural concerns, there is downside risk to Mapletree Commercial Trust’s DPU in 2018. The market will price in a slowdown in rental reversions across its portfolio, which should lead to a sell down in its overvalued share price.
SELL, TP $1.45 (current share price: $1.67)
Starhill Global REIT
Starhill Global REIT has a portfolio of 11 retail and office properties in Singapore, Malaysia, Australia, Japan and China. Starhill Global REIT offers a play on a recovery in discretionary spending, given that its malls are located in premier shopping streets. However, its overseas expansion strategy has yet to reach scale and gain traction. Starhill Global REIT’s net property income (NPI) has fallen to 35 percent over the past six years.
While Starhill Global REIT’s valuation is now at the historical average, its share price lacks any catalysts, in addition to the fact that Its balance sheet is relatively weaker than its peers and hence limiting its ability to look for acquisitions.
SELL, TP $0.70 (current share price: $0.775)