Analysts remain cautious over retail REITs in Singapore

With slowing tourist arrivals and an impending US interest rate hike, analysts are maintaining a cautious view on retail real estate investment trusts (REITs) in Singapore.

While some banks have cut their forecast for REITs’ distribution per unit, they noted that retail REITs have been largely reporting positive rental reversions.

Rental reversions for retail REITs have remained resilient despite a challenging business landscape for retailers. These are adjustments of rentals to market rates, when they expire or at a date earlier decided upon.

However, OCBC Bank said rental reversions would likely moderate in the near term, pressured by continued headwinds. These include sluggish tourist arrivals, uncertain demand due to softening economic growth, manpower shortages and consolidation among tenants. The increasing popularity of e-commerce stands to be another substantial threat.

Therefore, it expects prime Orchard Road rentals to drop by as much as 5 per cent, although suburban rents are expected to remain flat, with a downside risk.

Meanwhile, according to Chesterton, islandwide retail occupancy rate, which stands at about 93 per cent, may come down to about 90 per cent and this could weigh on REITs’ earnings.

OCBC Bank said it expects retail REITs with a suburban exposure to outperform those with properties in prime locations as they are less reliant on the tourism market.

“Like what we have seen in the 2Q 2015 results, the performance of the tenant sales as well as the shopper traffic for Frasers Centrepoint Trust as well as some of the suburban malls trust, they have actually been on the increase on a year-on-year basis, but some of the malls within the Orchard space, they have actually registered declines, in both shopper traffic as well as tenant sales,” said Mr Andy Wong, investment analyst at OCBC Investment Research.

In terms of share price, retail REITs had a turbulent ride over the past one month, but an analyst said the sharp decline could make dividend yields more attractive for investors.

“A lot of the REITs’ share prices have seen some softening in the last four to five weeks. We expect the yields, the dividend yields to actually see an uptick by as much as 10 per cent compared to what it was providing in the last three to four months,” said Mr Donald Han, managing director of Chesterton Singapore. “We expect probably moving forward, dividend yields could see north of 5.5 per cent, to as much as 6 per cent for retail REITs that are focused very much on the Singapore market.”

Market watchers have advised REIT managers to focus on keeping up the occupancy rate, improve on asset enhancement initiatives and risk management strategies.

Source : Channel NewsAsia – 29 Aug 2015

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