S-Reit universe may soon welcome a new asset class: grocery-anchored malls

A new asset class may soon be added to the Singapore Reit (S-Reit) universe later this year: grocery-anchored malls.

They may not seem exciting but property trusts anchored by these bread and butter businesses are seen as safe havens amid the challenges retailers are facing today.

Proponents of the asset class, which is a norm in the United States and Britain, tout the resilience of necessity shopping and non-discretionary spending, as well as the fact that people still prefer to see, smell and touch the food they buy.

As Phillips Edison Grocery Center Reit III, one of the largest owners and operators of grocery-anchored shopping centre in the US, put it: “There is no way to virtually thump a watermelon, or smell the freshness of that day’s peaches.

“Even the fastest growing online retailers realise the power of this investment, and are purchasing brick-and-mortar partner stores and physical retail locations…”

This may well refer to Amazon’s gradual entry into the brick-and-mortar retail space, including its acquisition of Whole Foods Markets two years ago.

The Business Times reported earlier this week that a US grocery-anchored necessity-based retail cum self storage Reit is looking to list on the Singapore Exchange (SGX) this year. The Reit is sponsored by a joint venture between UOB Global and an American property firm. BT understands that its properties will mostly be located in the Eastern seaboard, from Florida to New Jersey. Besides self-storage space, it will also own malls anchored by supermarkets and grocers, complemented by smaller ‘inline’ tenants.

Different from CapitaLand, Frasers Property Reits

These malls differ from the CapitaLand and Frasers Property heartland malls in Singapore which also count supermarkets as anchor tenants, but which are usually located in basement floors to increase shoppers’ footfalls.

For these American malls, on the other hand, their main anchor tenant usually accounts for 50 to 70 per cent of the net lettable area. The other inline tenants usually make up less than 5 per cent each and tend to be complementary lifestyle services such as hairdressers and dry cleaners.

Stock market insights platform Seeking Alpha notes that the right grocer located in such a mall can attract a customer two to three times a week, which also benefits other inline tenants at the mall.

“The ‘everyday necessity’ nature of the tenant mix provides stability to the rent roll and lowers sales volatility by driving traffic to the property both in good and bad times,” it said in a 2018 article.

It also noted that grocery sales growth has far outpaced other retail segments in the last decade and that grocery-anchored centres have historically commanded premium valuations relative to “power centres”, defined as large outdoor shopping malls that usually includes three or more big-box stores.

Equity analysts in the US have said that grocery-anchored Reits represent a flight-to-safety alternative to traditional retail Reits, thanks to their more predictable revenue. Institutional buyers are drawn in particular to grocer-anchored centres in high-traffic, middle- to high-income neighbourhoods.

The other asset class the incoming Reit will hold is self-storage space, the US equivalent of Singapore’s self-storage hubs such as Extra Space and Lock+Store.

Are the two asset classes complementary? A source tells BT that self-storage facilities in the US tend to be located near grocery-anchored retail malls – that is, next to main arterial highways in the suburbs. This may explain how it makes sense to house both kinds of assets in the same Reit, geographically speaking.

Different from Dairy Farm, Sheng Siong stock

So why buy grocery-anchored retail Reit, instead of shares supermarket operators such as Dairy Farm International and Sheng Siong?

There are at least two key differences.

Firstly, a Reit is differently structured from an ordinary share. A Reit is mandated to pay out at least 90 per cent of its taxable earnings as distribution to its unitholders, so unitholders can reasonably expect a much higher dividend yield compared to a stock.

Secondly, a Reit offers diversification in terms of geography as well as exposure to a range of grocery tenants, not just one. The Reit’s tenants are not solely made up of supermarkets but include a range, mostly focused on necessity shopping, which is considered to be more resistant to e-commerce. Although the Singapore bourse in recent years has been criticised as humdrum by some commentators, the S-Reit universe continues to be lively with new options and possibilities.

Interestingly, Reit and trust listings have accounted for an overwhelming proportion of fundraising in recent years. This year alone, they accounted for a whopping 98 per cent, because the non-Reit IPOs, all of which were Catalist listings, either did not have a public offer or raised very little from the public tranche.

It is no coincidence then that SGX has been capitalising on issuers’ interest to focus on building itself up as a regional Reit hub. Even as the local S-Reit universe matures, there is plentiful more to catch from overseas, even in developed markets.

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