- Possible landmark transaction involving Mercatus’s four dominant suburban retail malls to mark the “real estate deal of 2022”
- Singapore real estate allures international investors as a store of wealth; retail incumbents will be keen to get their hands on it
- Suburban capital values to remain resilient despite rising interest rates, ahead of expectations
- Pick FCT and LREIT to benefit if transaction materialises
Possible landmark transaction involving Mercatus’s retail mall portfolio will be keenly watched. Mercatus is looking at possibly divesting its stakes in four suburban retail malls (AMK Hub, Jurong Point, NEX, and Swing By @ Thomson Plaza) for a reported c.S$4.0bn. We are excited by this sizable opportunity, given the lack of tight ownership of retail real estate in Singapore. With dominant attributes like being located in key transport nodes and positioned mainly in the “essential services” sector, these malls have been proven to churn out resilient cash flows during testing times, and will attract robust interest. Operational performance has rebounded in FY21 to c.96% of pre-COVID levels and should continue to head higher in FY22. Assuming a 68%-70% operational margin, we estimate FY21 yields to range between 4.3%-4.4% (pre-COVID yields were 4.6%-4.8%), which is at a similar level to recent transactions within the retail space.
Singapore real estate’s enduring allure likely to evoke strong interest amongst the local incumbents. Singapore real estate is seen as a store of value within Asia, and thus attracts international capital. That said, we believe that this retail portfolio is likely to attract local incumbents with retail operator-backed sponsors, given that “getting it right” in retail real estate is more about managing the property well rather than getting the timing of the real estate cycle right. Given the sizable portfolio, we anticipate that listed REITs like CICT, FCT, and LREIT, working together with their respective sponsors or even developers like CDL and Far East Organisation, will be keen to get their hands on this portfolio.
What it means for suburban retail landlords. We see a structural trend in place for suburban retail real estate anchored by (i) the “premiumisation of retail offerings” supported by higher income growth in Singapore’s population in the long term and (ii) structurally higher traffic, given a new hybrid working trend. We are seeing this already in the numbers, with FCT reporting tenant sales from Jan 22-May 22 that are, on average, 110% of pre-COVID levels. Trading at an implied cap of 4.5%, we see value in FCT and reiterate our BUY call. LREIT’s recent value-accretive pivot into the suburban retail space will drive a compression in yields over time.