, Singapore

Why suburban malls are considered a resilient asset class in Singapore

They are now closer to the working population as work-from-home arrangements continue.

Shopper traffic and retail sales have registered a pick-up with Singapore’s re-opening and will gain traction in phase 3, as social distancing restrictions ease and more people return to offices. According to Maybank Kim Eng, tenant sales were already back to 78-98% of pre-Covid levels in 3Q20 (from 37-95% in 2Q20), and ahead of footfall, which was down 40-50% YoY, but this decline should moderate with the anticipated 25% increase in capacity limits for malls and large standalone stores (from 10 sqm to 8 sq m per shopper).

Meanwhile retail sales fell by a softer pace of 8.6% in Oct 2020, improving from -10.7% in Sep, while online sales has risen to 10.5% of total retail sales and 11.7% for 10M20, as compared to 5.8% for 2019.

Here’s more from Maybank Kim Eng:

Against the challenging operating backdrop, retailers downsized their store footprints while others exited the market, with further consolidation likely among weaker performing stores. Department stores were struggling before Covid as they fought to stay relevant amidst changing consumer preferences and the proliferation of online retail, and fared worst despite the exit from the ‘circuit breaker’, with sales at c.40% below pre-pandemic levels. Robinsons emerged as the latest casualty of the pandemic, as it announced the closure of its last two stores at end-Oct 2020. F&B tenants are at 12-38% of REITs’ gross rental income, and remain in cautious expansion mode.

Supply growth has outpaced sales growth in recent years, but should reverse with the limited pipeline of 0.3m sf pa from 2021-23, versus 0.7m sf over 2015-19. This will help cushion vacancies, which rose from 7.5% as of end 4Q19 to 9.6% in 3Q20. Rental corrections accelerated in 3Q20 with expiry of (government-backed) rental rebates, while downtown malls relying on tourist and office footfall suffered greater stress, pushing rent premium between prime suburban and Orchard Road to a historical low of 3.5%. We expect this gap to narrow further, without the tailwinds from tourism spend, traditionally accounts for c.20% of retail sales, limiting scope for positive rental reversions in 2021.

Suburban malls, now in closer proximity to a work-and-live population, on the back of increasing remote work practices, remain a resilient asset class and our preferred exposure. This is also given their higher essential services (F&B, services, supermarket & hypermarket) trade mix at c.40% of overall NLA and c.55% of gross rental income, relative to downtown malls. FCT remains our preferred pick, as its market share of suburban retail floor space has jumped from 5.4% to 10.2% following the AFR acquisition, while its liquidity improved due to the SGD1.3b EFR in Oct 2020. Its portfolio has been cleaned up with the divestments of two underperforming assets - Bedok Point, and Anchorpoint, to complete by 22 Mar 2021. We forecast DPU growth of c.39% for FY21, driven by the consolidation of the ARF assets and tax savings.

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