■ More sales stability for suburban malls
Island-wide retail sales (ex. motor) remained weak in 2015, but tenant sales at REIT malls started to recover in 2015 and have outperformed island-wide sales. Additionally, the more stable retail sectors, F&B and supermarkets make up 35-50% of the rental income at suburban malls, while there are still some expansions and new brands entering the market.
■ Over the hump on retail supply
Retail stock is expected to grow at a manageable 1.7-2.3% p.a. from 2015-18, after peaking at +3.9% in 2014. Orchard Road and fringe areas should see the least supply pressures, in our view. Over half of the incoming supply is expected to be suburban; however, this is mainly spread across six malls, two of which are at the airport. The downtown core will the main area facing supply pressures due to supply peaking in 2015 (+6.8%) and remaining relatively high in 2016 (+5.4%).
■ Attractive valuations
Performance of the REITs have largely been driven by fears over a rate hike during the past six months with most names being sold down 15-20%. Retail REIT yields are at attractive levels, ~1 s.d. over historical averages, offering yields of 6.1-6.5%. There are risks to asset values if cap rates expand, but we note that the actual Net Property Income yields of key retail assets already provide a buffer of ~0.5 pp while P/Bs are already ~1 s.d. below historical averages. Retail is our preferred REIT subsector and we believe suburban retail will be the most resilient. We have Outperforms on CMT (6.1% yield), MCT (6.5%) and FCT (6.4%). Top pick is CMT; TP down to S$2.30 (vs S$2.36). (Read Report)
Source : Credit Suisse Asia Pacific Equity Research