Broker's take: Maybank Kim Eng 'negative' on retail Reits

SINGAPORE'S retail real estate investment trusts (Reits) continue to face rising rates, peak new supply and structural challenges despite a cyclical rebound in tourism and a stronger economy, Maybank Kim Eng analysts said in a recent report.

The brokerage initiated coverage of the sector with a "negative" call, giving a "buy" recommendation only to top-pick Frasers Centrepoint Trust (FCT).

CapitaLand Mall Trust and SPH Reit earned "hold" calls, while Mapletree Commercial Trust and Starhill Global Reit received "sell" ratings.

Maybank Kim Eng noted that optimism has been rising on retail Reits as tourism, GDP growth, the job market and consumer sentiment improve.

But retailers and malls are also feeling the heat from e-commerce competition and sales leakages as Singaporeans increasingly spend overseas or via online channels. Such structural challenges look daunting with online penetration potentially climbing to between 10 and 20 per cent from 4.6 per cent of retail sales.

Sales per square metre of retail space have also eroded 6 per cent over three years, with long-term organic growth rates for retail Reits lacking visibility, the broker said.

Despite these considerations, Maybank Kim Eng considered FCT, which has three malls in the north of Singapore that make up 80 per cent of its assets under management, as more resilient.

Elsewhere, the broker flagged a weaker outlook for suburban malls, and it forecast that prime Orchard Road rentals will stage a recovery in 2018 due to tight supply.

Maybank is projecting a 14.4 per cent total return upside for FCT, versus up to an 11 per cent downside for other retail Reits.