Retail REITs – CIMB

Towards greater heights

• Yoy, January retail sales ex-auto rose to their highest in 11 months. While seasonality may have distorted the data as Chinese New Year celebrations fell earlier this year than in 2010, January’s 15.6% growth was nonetheless the 15^th consecutive month of positive yoy growth. The increase was also broad-based with department-store sales up 21.5% yoy, sales of apparel & footwear up 16.7% yoy and sales of watches & jewellery up 14% yoy. These segments were the leading contributors.

• New weightings and new base year for index. Every five years, government statisticians would re-weight components in Singapore’s retail sales index to “reflect changes in the structure of retail trade and food and beverage services industries.” The new base year is now 2010 instead of 2005 and the most significant change is a cut in the weighting for auto sales, from 34.5% to 24.7%. Auto sales in Singapore are affected more by the government’s private-transport policy than consumer sentiment. On the other hand, the weights for other key segments have been raised: department-store sales (+2.03% pts), apparel and footwear (+1.72%), watches and jewellery (1.63%) and tech goods (1.9%). Despite auto’s lower weighting, headline retail sales are still distorted by auto sales and this is the reason for our preference for retails sales excluding auto as a better proxy for underlying consumer sentiment.

• Discretionary spending to remain robust despite external shocks. Strong job and wage growth is likely to support further retail-sales (ex-auto) growth of about 7% this year (7.2% in 2010) and growth in real private consumption of 3-3.5% (4.2% in 2010, 0.2% in 2009). We do not expect the Japanese disasters or the unfolding events in North Africa/Middle East to have a long-lasting impact on private consumption unless global business confidence is dented in a major way in the coming weeks or months. While international airlines have been reporting light passenger loads going into Japan, outbound flights are full. And while the Japanese disasters might reduce Japanese arrivals in the near term, we maintain our overall tourist-arrival growth forecast of 8-10% for this year, to 12.8m (11.6m in 2010, government forecast of 12m-13m).

• Stock implications: FCT and CMT well-placed. With stronger retail sales expected to benefit retail tenants and drive up occupancy rates and rental reversions, we expect retail REITs like FCT and CMT to be beneficiaries. Between the two, we prefer FCT for its organic growth from asset enhancement at Causeway Point, acquisition growth potential and more resilient rental profile.