Singapore REITs Sector - Some bright spots in retail


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

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