Retail REITs – DBSV

Stable sector amid market gloom

• Consumers may become more cost conscious

• More resilient non-discretionary spending should support suburban retail sales and rents

• Positive rental reversion and AEI to underpin Retail Reit earnings

• Prefer MCT (TP S$1.09) and CMT (TP S$2.08)

Back to basics. YTD (9M11), retail index excluding motor vehicles sales grew by 8.1% y-o-y, which is a shade below the 2007 peak driven largely by discretionary spending. Looking ahead, we believe consumers may start to tighten their belts amid growing economy uncertainties with early indicators signaling weakening consumer confidence. That said, unemployment at relatively low levels of c2-3%, should help to partly offset the drag and support consumer spending. Hence, malls comprising higher components of supermarket and departmental stores will fare better.

Suburban occupancy and rents show resilience. Occupancy in the retail market is generally higher than office and the multi-factory industrial space as supply activities in the retail sector are less speculative. As evident in 2009, despite economic uncertainties, retailers took up a total of around 1.6 m sq ft of retail space (>3x the long term average) and occupancy dipped only by a marginal 1%pt, hence underlining the resilience of the sector. Within this space, suburban occupancy and rents appeared to be “stickier” than Orchard Road prime space during recessionary periods. In addition, suburban retail space per capita is still under served compared to other major cities and will benefit from the steady population growth.

Earnings underpinned by positive rental reversion and AEI works. During the GFC, we noted that average occupancy rates of the retail reits were high, moving within a tight 1%pt with suburban landlords able to renew rents up. Hence, we believe that rental reversions for retail space will remain positive despite the anticipated slowdown in economy. Earnings growth will also be underpinned by asset enhancement initiatives and asset repositioning moves.

Stock Picks: MCT and CMT. Among the retail landlords, we like MCT as it has the highest proportion of its income up for renewal. We expect healthy positive rental reversion given that the expiring rents were locked in at lower rates. We also like CMT as a market leader in its space. Both MCT and CMT also offer FY11-13F earnings CAGR of c.8%, one of the highest in the Sreit sector.