Interest in S-Reits with China retail exposure set for shake-up

Singapore

RETAIL spending in China is rebounding, yet investors have been giving a mixed verdict on the three China pure play retail real estate investment trusts (Reits) listed here.

The competitive landscape is meanwhile evolving quickly for these S-Reit players, so investor interest may see some further shake-up.

Retail sales in China in the first three months rose some 34 per cent from a year ago. This is stronger growth from that in April and May. Then, retail sales were up 17.7 per cent and 12.4 per cent respectively year-on-year (y-o-y).

Sales at physical stores have also recovered to pre-pandemic levels in the last quarter of 2020 and non-online retail sales are slightly higher than pre-pandemic levels in the first five months of this year, according to a DBS Research report.

Against this backdrop, retail landlords in China posted solid Q1 numbers too. CapitaLand China Trust, which has S$3.7 billion of assets under management in Chinese malls, reported shopper traffic and tenant sales up 52 per cent and 47 per cent y-o-y respectively in Q1.

Sasseur Reit, which owns four outlet malls, saw sales at the properties jump 113 per cent from a year ago to 1.14 billion renminbi (S$237.3 million) in Q1, which is 6 per cent below that in the first three months of 2019. Distribution per unit (DPU) rose 32 per cent y-o-y in Q1.

Betting on growing wealth and spending power of the Chinese consumer seems a sure win. In Q1, the disposable income of urban residents increased 12 per cent from a year ago.

Troubling signs

The Chinese government is looking to boost domestic consumption as part of its "Dual Circulation" strategy to pivot China to self-reliance on domestic consumption, distribution and production.

But it may not have been plain sailing for mall owners in China even before the pandemic struck. CapitaLand Retail China Trust, which used to focus on retail malls only, before expanding its mandate, acquiring business park assets and changing its name to CLCT, posted its lowest DPU in 2019 over a five-year time frame between 2015 to 2019.

Investor interest has been lukewarm for BHG Retail Reit and Dasin Retail Trust. Both trade below their initial public offering (IPO) prices. BHG Retail Reit trades at around two-thirds of its last reported net asset value (NAV), while Dasin trades at under half of last reported NAVs. To be sure, Sasseur Reit trades above its IPO price and its latest reported NAV.

For Q1, BHG Retail Reit's committed occupancy rate is 92.1 per cent while Sasseur Reit and Dasin Retail Trust have occupancy rates of 93.5 per cent and 96.1 per cent, respectively.

Covid-19 wreaked havoc in China in the early part of last year with many places entering severe lockdowns. But life started gradually returning to normal in April 2020.

Perhaps investors like Sasseur Reit for its resilience through the pandemic. In 2020, Sasseur Reit's DPU rose 0.2 per cent y-o-y compared with the plunge in DPU of 50 per cent and 42 per cent respectively for BHG Retail Reit and Dasin Retail Trust.

But the bigger factor to note is the competitive landscape in China and how managers behind these retail trusts are responding to it.

While there are rich pickings from growing domestic consumption in the world's second biggest economy, the fight for a share of the wallet of the consumer is fierce. Led by the likes of Alibaba, JD.com, and Pinduoduo, online shopping is making great strides in China. Deep and broad mobile penetration coupled with development and growth in the logistics market and last mile delivery capabilities underpin the growth of e-commerce in China.

Getting the models right

According to DBS Research, e-commerce's share of retail spending, which is around 27 per cent of the total retail pie in the first four months of this year, will continue to grow.

This means owners and operators of physical shops need to get their models right to thrive.

Sasseur Reit focuses on selling products of luxury and high-end brands at discounted prices in well-designed properties that are located in fast-growing tier-2 cities. The trust's manager says that its outlet malls can compete against e-commerce platforms by ensuring authenticity of products sold and taking less commission than online platforms from the brands.

Sasseur Reit's manager highlights that design and lifestyle elements at its outlets are constantly refreshed, to avoid the problem of homogeneity in retail business in China, and give vibrancy to its outlets, thereby creating emotional connections with patrons.

Sasseur Reit's latest annual report describes in some detail the life of Xu Rongcan, the founder and chairman of its sponsor Sasseur Group. Mr Xu started in business running a bar, which attracted patronage from artists. He met his partner in business and in life Yang Xu, when she was 21. Together, the duo grew Sasseur Group's outlet mall business.

Outlet shopping is seen as a sunrise industry, which China Insights Consultancy projects will grow at a compound annual growth rate of nearly 18 per cent over 2021 to 2030.

In China's competitive retail landscape, investors will be banking on Sasseur Reit's business model and execution.

Meanwhile, Dasin Retail Trust, which focuses on malls in the Greater Bay Area, is undertaking a comprehensive adjustment on the trade and brand mix at its properties. Trades with relatively weak operating capabilities such as traditional home furnishing have been gradually phased out, and some brands with strong customer attraction are gradually being introduced. Dasin Retail Trust's manager is also eyeing acquisitions in the Guangdong-Hong Kong-Macau Greater Bay Area from its sponsor Zhongshan Dasin Real Estate.

Increasingly, what may interest investors in S-Reits owning China assets is China's efforts to set up Reits.

The first crop of nine Reits, with a total portfolio value of 31 billion renminbi listed on the Shanghai and Shenzhen stock exchanges on June 21. They are three industrial park Reits, two warehouse Reits, two toll road Reits and two waste management Reits

Speaking to The Business Times earlier this year, Henry Zhao, chairman of Harvest Fund Management, was positive on prospects for Reits in China. He expects Reits to be popular with investors as they will provide investors such as pension funds with an alternative instrument that pays steady cash dividends. Such structures are uncommon in the Chinese equity market.

At present, China only allows Reits to invest in infrastructure projects, unlike markets in Hong Kong, Singapore and the United States, where Reits can invest in shopping malls and office buildings. But over time, China is expected to allow its Reits to invest in commercial properties.

Might sponsors and managers of Singapore-listed Reits owning China assets have a head start tapping opportunities in the Chinese Reit market, given the experience and know-how they have built up? Could Singapore-listed Reits owning China assets shift their listings to the Chinese market if they get better valuations there?

Growth prospects

To note, ARA Asset Management had recently agreed to have two of its subsidiaries buy a 50 per cent stake in the trustee-manager of Dasin Retail Trust and 5 per cent of the total units issued in the trust.

ARA, which had S$116 billion of gross assets under management as at end-2020, expects listed Reits to proliferate rapidly in new markets such as India, China, and Korea. ARA's entry into Dasin Retail Trust may strengthen the trust's growth prospects and its credentials in the emerging Chinese Reit market. ARA notes that in Asia-Pacific, the current public Reit equity market capitalisation represents one per cent of gross domestic product (GDP), compared with US public Reit equity market capitalisation of over 5 per cent of GDP.

Then, late Monday evening, Dasin Retail Trust's trustee-manager announced that the proposed transaction with ARA would be terminated.

The trustee-manager said that its chairman and controlling shareholder Zhang Zhencheng had entered into a non-binding memorandum of understanding with Sino-Ocean Capital Holding to pursue a strategic partnership with Chinese real estate fund manager Sino-Ocean Capital.

According to Mr Zhang, the partnership will involve an acquisition by Sino-Ocean Capital or its affiliate, of 70 per cent of the total issued share capital in the trustee-manager from Mr Zhang.

Investors need to pay heed to what is happening with physical real estate assets in China as well as securitisation efforts there. These forces could dictate how well China focused Reits listed here trade, and how the Singapore Reit market may be impacted by growth in securitisation in China.