Retail Reits facing a bump in the road - for now

THE tougher safe-distancing measures announced earlier this month are a disappointing but possibly temporary setback for Singapore's retail Reits, some of which have been touted as post-pandemic "reopening" plays over the last few months.

Although Singapore's borders still remain largely shut to tourists, domestic demand has helped to keep cash registers ringing. In the second consecutive month of growth, retail sales for March increased 6.2 per cent year-on-year, partly due to a low base. On a month-on-month (seasonally adjusted) basis, retail sales were 3 per cent higher.

The latest restrictions, which are a softer version of last year's "circuit breaker" and will remain in place until June 13, are likely to interrupt this recovery. This, in turn, could further weigh on investor sentiment towards Reits, which were already grappling with concerns over inflation and rising bond yields, analysts have pointed out.

Under the latest safe management measures, shopping mall operators are required to cap foot traffic at their premises at just one person per 16 square metres (sq m) of gross floor area (GFA), compared to one person per 10 sq m previously.

Food & beverage establishments are also no longer allowed to cater to dine-in customers. In addition, working from home is once again the default mode, which has reduced the number of people out and about.

The impact will vary from one retail Reit to another though. Retail Reits with largely suburban malls in the portfolio - such as Frasers Centrepoint Trust (FCT) - are expected to prove more resilient than those with malls downtown or in the central business district.

While dining out isn't an option now, F&B outlets at suburban malls could still see steady sales from takeaways and through food delivery services. Supermarkets and grocers at these malls could also see strong demand, as was the case last year.

On the other hand, retail Reits such as Lendlease Global Commercial Reit, Starhill Global Reit and SPH Reit have exposure to downtown malls, which makes them more dependent on the tourist dollar and the office crowd.

Share prices of retail Reits have declined following the tighter measures, serving as an opportunity to accumulate the more resilient ones.

OCBC Investment Research forecasts a rebound in DPU by 27.3 per cent for retail Reits for the current financial year, followed by growth of 5.6 per cent in FY22/23.

However, downside risks loom for the retail Reits. One risk for investors is that landlords may have to step up the amount of rental assistance given to tenants to keep them from closing their doors, which could weigh on the distributions per unit (DPU).

According to a report by CGS-CIMB, every half-month of rental rebates doled out to all tenants would impact the FY21 distribution per unit (DPU) for retail Reits by between 2 and 5 per cent.

Still, "unless substantial rental rebates are given out, we do not expect the tighter measures to have a substantial impact on the Reits' financials as the impact from rental reversion will be spread out", the report said.

Another risk for investors could be the challenging leasing environment. While occupancies have remained high at over 96 per cent, CGS-CIMB is forecasting rental reversions of -3 per cent to -20 per cent for FY21.

A lot may depend on how the next couple of weeks pan out, especially if the government moves to extend the existing safe-distancing measures or tightens them even further. The latter would likely give way to more austere rules, delivering a big blow to the broader retail industry.

Yet, there is reason for optimism. Singapore has acted decisively to stamp out the surge in infections. With experience from the "circuit breaker" days, landlords and tenants also have a sense of how to deal with the current heightened measures - for instance, through e-commerce.

The ongoing vaccination programme offers some hope too, with the government now adjusting its strategy by spreading out the duration between doses so as to cover a bigger proportion of the population faster.

Successfully containing the resurgence in Covid-19 cases over the next few weeks could mean the difference between a speed bump and an altogether more significant setback for retail Reits in the pursuit of recovery.

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