Dwindling retail property supply to be a boon for REITs

A ‘landlord-favourable’ market will persist, whilst occupancy rates could stabilise at 93%.

The supply of retail properties is projected to drastically drop to an average of 43,000 sqm per year from 2020 to 2023, from a peak of 250,000 sqm in 2019, according to DBS Group Research. But given the current circumstances, with demand for space falling rapidly, this is expected to be a relief for retail REITs.

This is also despite the Singapore Tourism Board’s projections of seeing a 20-30% dip in tourist arrivals in 2020.

“Despite the robust net supply of retail spaces in the market in 2019, net absorption was relatively healthy with good take-up within the newly completed projects. Funan Mall, Jewel and PLQ, which represented three-quarters of retail supply in 2019, are currently at occupancy levels of 98.7%, 100% and 90% respectively,” said Derek Tan, analyst at DBS Group Research.

He also noted that a ‘landlord-favourable’ market will continue to persist, whilst occupancy rates are likely to stabilise at 93% by end-year.

The report also stated that the impact of the dip in tenant sales on distribution per unit (DPU) could be marginal in the range of 0.2-1.2%, given that the percentage of retail landlord’s rents that are tied to gross turnover is less than 5%.

On the leasing side, retail REITs’ average lock-in period of 2.6 years is not expected to see an immediate impact, as those with a higher exposure to suburban retail malls, grounded by necessity spending, will stand to benefit in place of prime retail malls that are more dependent on tourist spending.

“The yield disparity between CapitaLand Mall Trust (CMT) and Frasers Centrepoint Trust (FCT) drifted wider due to the recent COVID-19 outbreak, as suburban retail malls stand as the main beneficiaries in the turn of events given their proximity to residential catchment areas and primary focus on necessity spending, as opposed to prime retail malls which partly rely on tourist spending,” Tan stated.

However amongst its tenants, it is expected that F&B will be the most impacted, recalling that the F&B index dipped close to 40% YoY in April 2003. F&B tenants normally make up a big percentage of retail malls’ contribution by gross rental income, in the range of 40%, and an extended period of non-operations may hurt tenants and landlords alike.

“Estimated worst case scenario of c.-3 to -5% impact in distributions (up to c.-7.5% for China focused REITs) unlikely to materialise if impact of Covid-19 outbreak is not prolonged,” Tan said.