- Next lap of retail recovery to ride on tourists while domestic spending to remain a bedrock for retail sector
- Passing rents are c.10% below normalised levels despite sales exceeding 120% of 2019 levels; expect up to +5% reversionary rents in the coming years
- Analysis of tenant health shows profitability has returned to the green, despite peaking cost pressure; ability to pay higher rents supported by stronger sales
- Maintain positive view on suburban retail – FCT and LREIT
Domestic spending the rock anchoring retail sales recovery. Singapore’s retail scene has started its next lap of recovery as tourists return to shop, spend, and feast from 2H23 onwards. Tourist receipts have swiftly recovered to c.75% of pre-COVID levels in 4Q22 – a larger than proportional increase compared to arrivals (c.50% of pre-COVID) – and is expected to improve. While the market expects local consumption to weaken, given the moderate economic growth and overseas travel, we think otherwise. We believe overall retail spending will be structurally higher (+20% above pre-COVID), aided by inflationary and consumption pattern changes. We believe our retail S-REITs’ (picks: FCT, LREIT) exposure to essential trade sectors (i.e., F&B, services, etc.) will remain the anchor for resilient performance heading into 2H23-2024, even if the economy cools.
Time for rents to catch up as tenant sales recovery reduce occupancy costs. With tenant sales resilient at >120% of pre-COVID levels, we believe there is scope for rents to “play catch-up”, especially at selected dominant malls within some S-REIT portfolios. Our analysis shows that average suburban passing rents have recovered ahead of Orchard and CBD rents, to c.99% of 2019 average levels, versus 90% for Orchard passing rents and 87% for CBD passing rents, mirroring the trend in tenant sales performance. Occupancy costs, on the other hand, have trended down to a six-year low of c.16% for most of our retail-focused S-REITs, implying that there is scope for upward rental adjustments that markets are not pricing in at this point.
Reversions of +5% sustainable in the coming 3 years to ride out full recovery in rents; maintain top sector picks FCT, LREIT. We looked at the performance of various tenant trade sectors and see much promise. We noted the sustained recovery in sales for most retail trades, to above the 2019 pre-COVID levels for at least six consecutive quarters, and we estimate c.48% of gross revenue exposure in our S-REITs are maintaining profitability through their ability to pass on cost pressures.Rental reversions of +5% over the next three years, alongside lease renewals, will be necessary to ride out a full recovery in retail rents and support DPU growth amongst our retail landlords. We remain optimistic on defensive suburban retail, with top sector picks Frasers Centrepoint Trust (FCT) and Lendlease Global Commercial REIT (LREIT).