Time to splash the cash!

•Retail value (ex-F&B) recovered to c.92% of normalised-levels and is at an inflection point

•Stronger foot traffic at malls to drive portfolio retail-sales, tourist spend could spring a surprise for 2022.

•Sector offers attractive yields of 5.6%, with earnings-upside from “atrium sales” with strengthening-reversions.

•Top picks CICT, FCT, LREIT, and CLCT for overseas-retail

Retail sector at an inflection point, more positives in 2022 as consumer confidence remains high and tourists return. Retail sales in 2021 recovered to c.92% despite periodic “lock-downs” as local spending continued to outweigh the “lost tourist dollar”. We believe that the pivot to more online spend will not be a significant disruptor in Singapore, as we have seen landlords and tenants embark on an omni-channel strategy with brick-and-mortar stores complementing online offerings. With brighter economic prospects driving wage increases coupled with tourists returning into our shores, we see the retail sector on a stronger footing come 2022. We project rental reversions turning positive starting with our suburban landlords with improving portfolio occupancy rates.

More catalysts ahead; stronger traffic at malls to drive further upward trajectory in tenant sales, retail S-REITs to post a c.5.6% jump in distributions. With Singapore’s ‘endemic-approach’ towards the COVID-19 pandemic, we believe that the risk from the Omnicron virus is unlikely to lead to a full-blown domestic lockdown. We believe that it is only a matter of time that border reopening and further domestic relaxation will restart sometime in 1Q22. Vaccinated travel lanes with partner countries encompass c.57% of historical inbound markets and will be a lift to tourist retail sales inFY22. In addition, the potential relaxation of restrictions on“atrium sales” will be a positive earnings surprise for selected landlords (FCT, MCT, and CICT), which contribute between 3-5% of revenues, which have been “lost” since 2020.

Sector valuations below book at 0.97x; Top picks FCT, CICT, LREIT, and CLCT for overseas retail. Sector valuations are currently trading below book at 0.97x close to its five-year historical mean of 1.01x. Forward FY22 yields are compelling at 5.6% for defensive big cap names FCT and CICT. We see lower downside risk of rental rebates in 2022 and conservatively priced in 0.5 months in our view, from 1-1.5 months this year. Maintain top sector picks Frasers Centrepoint Trust (FCT) on resilient tenant sales, CapitaLand Integrated Commercial Trust (CICT), and Lendlease Global Comm REIT (LREIT) on border reopening and domestic relaxation play. We also pick CapitaLand China Trust (CLCT) amongst foreign retail plays for attractive valuations at a 0.8x book and a rare 8% forward yield.