Brokers’ take: DBS expects Mercatus deal to support capital values for suburban retail malls

DBS Group Research on Thursday (Jun 23) said it expects the potential sale of Mercatus Co-operative's stakes in AMK Hub, Jurong Point, Nex and Swing By @ Thomson Plaza to support capital values for retail malls in the suburban space.

The research team also anticipates selected malls under CapitaLand Integrated Commercial Trust (CICT), Frasers Centrepoint Trust (FCT) and Lendlease Global Commercial Reit to benefit from the sale, helping valuations.

On Jun 16, The Business Times reported that Mercatus is looking to bundle its stakes in the 4 retail assets for sale "in excess of S$4 billion". The investor, owner and manager of real estate assets has also appointed JPMorgan as its financial adviser for a strategic review of some of these assets.

In a research report, DBS noted FCT and Lendlease Reit as top picks to benefit if the transaction materialises. It has "buy" calls on both counters, with target prices of S$2.90 and S$1.05 respectively.

As at 3.22 pm on Thursday, FCT was trading 0.9 per cent or S$0.02 higher at S$2.25, while Lendlease Reit was trading flat at S$0.785.

DBS analysts Geraldine Wong and Derek Tan see value in FCT, which is trading at an implied cap rate of 4.5 per cent. They also project that Lendlease Reit's recent value-accretive pivot into the suburban retail space will drive a compression in yields over time.

On the 4 retail assets up for grabs, DBS estimates the portfolio average rent to be close to S$15 per square foot (psf) per month, or between S$10-16 psf, which has the potential to yield upwards over time.

Valuations have remained "fairly stable" over the years as well. Apart from strata mall Swing By @ Thomson, the remaining 3 malls have an average valuation of around S$2,900 psf, which has risen by an average of 1.1 per cent over FY2017 to FY2021.

"The assets are, in our view, 'dominant malls', where the malls' location near/at key transport nodes and big population catchments imply strong recurring daily traffic," Wong and Tan said.

They expect the portfolio to see robust interest from local players, as retail assets need more active management. That being said, S-Reits (Singapore-listed real estate investment trusts) will likely need to tap into their respective sponsor's balance sheets if they wish to acquire the portfolio due to high funding costs and cost of equity.

DBS also noted that the Mercatus deal could set a new record low for retail mall transactions based on its estimated net property income yield of 4.1 per cent to 4.3 per cent. This is around 10-30 basis points below the latest precedent transaction for large-sized dominant suburban malls.

In the first quarter of 2022, Lendlease Reit fully acquired Jem at a cap of 4.4 per cent, or 4.5 per cent for the retail portion of the mixed-use development, DBS said.


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