Brokers' take

Singapore Retail Reits | Negative (Initiate) Maybank Kim Eng Research, Jan 1

SINGAPORE'S retail real estate investment trusts (Reits) are enjoying a cyclical recovery from a rebound in tourism and a more constructive economic landscape.

But rising rates, peak new supply in 2018 and fair valuations should restrain near-term price upside.

Structural challenges look daunting; sales leakages from outbound travel persists, while online penetration at 4.6 per cent of retail sales could potentially climb to 10-20 per cent.

Sales per sq m of retail space have already eroded 6 per cent over three years, with long-term organic growth rates for retail Reits lacking visibility.

We initiate the sector with a "negative" rating.

Frasers Centrepoint Trust is our top pick. The Reit's six properties are well-entrenched in Singapore's densely-populated city fringe and suburbs, with its tenancies concentrated in necessity trades, hence insulated from retail headwinds.

We expect the positioning of its three north malls (80 per cent of assets under management) to be strengthened given limited competition.

We see catalysts from positive reversions at its Northpoint City's North Wing post-asset enhancement initiative, and potential acquisition of assets from its sponsor.

Valuations at 5.3 per cent distribution per unit (DPU) yield remain undemanding given visible growth drivers, strong balance sheet and potential acquisition upside.

We have "sells" on Mapletree Commercial Trust (MCT) and Starhill Global Reit (SGReit).

Looking ahead, we believe the market will need to price in a slowdown in rental reversions across its portfolio, and thus we look for MCT's share price to lag its retail peers. We find the shares overvalued.

SGReit's 11 retail and office properties in Singapore, Malaysia, Australia, Japan and China offer a play on a recovery in discretionary spending, with its malls mainly located in each market's premier shopping street.

However, its overseas expansion has yet to reach scale and gain traction, with net property income falling the past six years from 40 per cent to 35 per cent in 2017.

We find the shares moderately overvalued. We see SPH Reit as a better proxy to stronger tourist arrivals and recovery in prime Orchard Road rents.

Compiled by Cai Haoxiang

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