Retail REITs – OCBC

Limited near term catalysts; Maintain NEUTRAL

Mixed retail sales data. Singapore Retail sales in Mar 2011, excluding motor vehicles, were up 7% YoY but down 1.3% MoM. The yearly sales increase was partly the result of escalating inflation. At constant price, retail sales were, nonetheless, up 4.6% YoY but down 2.4% MoM. Compared to Mar 2010 and adjusted for inflation, only the food & beverages, wearing apparel & footwear and furniture & household equipment segments recorded growth of more than 7%. The largest drop, however, came from supermarkets and optical goods & books which declined approx. 2%.

Rental rates mixed as well. According to CBRE, the retail leasing market also gave mixed signals in 1Q11, with major leasing deals concluded (Abercrombie & Fitch at Knightbridge, Cold Stone Creamery at Orchard Building) as well as the exit of some anchor tenants (such as ALT at Heeren) along Orchard Road. Monthly rents for prime Orchard Road averaged $30.10 psf/month in 1Q11, dropping 0.5% QoQ. Suburban rents remained at $29.10 psf/month, unchanged from the previous quarter. On average, the gap between prime Orchard and suburban rents continues to narrow, amounting to S$1.00 this quarter compared to S$4.10 a year ago. It is likely that prime retail rents along Orchard Road will continue to slide in the near term as recent completions along Orchard Road have not been digested and rental re-negotiations at some of these malls are impending. For example, more than 20 retailers at shopping mall 313@Somerset have banded together recently to petition for lower rents after struggling to attract customers. We also heard on the street that business for tenants in older malls such as Orchard Plaza, Far East Plaza, Heeren and Midpoint Orchard continue to deteriorate, dropping by some 30%-50% ever since the newer malls opened.

Supply Issues. According to our estimates, there is approximately 1.9m sq ft of mall space in the 2011-2012 pipeline. The retail sector continues to grapple with supplyside issues, brought on by the massive injection of new retail space in 2009-10. Some of the tourism expenditure is also diverted to the casinos and more consumers are shopping online, particularly among the younger group. The appreciating SGD will also affect tourist spending and motivate more Singaporeans to shop overseas. In fact, Knight Frank has forecasted that prime Orchards rents are likely to remain flat while suburban rents are likely to see only upside of about 2% – 3% this year. Landlords face an increasingly uphill task ahead to maintain attractive rentals, not only to retain but also to enhance the tenant mix. With limited near term catalysts, we think Singapore-based Retail REITs are likely to trade range bound. Maintain NEUTRAL on the overall sector.