Retail REITs – DBSV

Still a safe house

• AEI to take centrestage in driving earnings growth amidst slowing retail sales growth in 2013

• Suburban retail to continue attract good interests despite incoming supply

• Extra earnings kicker could come from acquisitions, particularly from sponsors’ pipeline

• MCT top pick given its superior earnings profile; SGREIT offers an attractive relatively yield to retail peers

AEI malls showed superior rental growth. Underlying fundamentals in the retail real estate sector remain strong. Rents have stayed resilient in the past year, largely supported by annual built-in step up rents. While increasing market shares, as evidenced by decade-high leasing transaction volumes, continue to be the retailers’ main focus despite rising cost pressures, the latter is likely to have a bearing on rental pricing ability with occupancy costs now at 16-17%. With retail sale expected to grow at 2-3% next year, we expect reversion to track inflation rates. Our preferences are for market beaters/outperformers that can exceed this benchmark for rent rolls via successful Asset Enhancement Initiatives (AEI) activities, to deliver superior earnings growth.

Still prefer suburban for its strong leasing interests. From a supply angle, the suburban market segment continued to be at almost “full house” at 98% occupancy. Going forward, c.50% of the new supply will come from suburban locations over the next four to five years but we believe robust consumer sentiment, amid a low unemployment environment, would translate to a keen appetite for new retail space.

Rerating catalyst could come from acquisitions, prefer reits with strong sponsors. Trading at an average P/BV of an average 1.1x and an average implied yield of 5.0%, we believe that certain retail reits could look at acquisitions to spearhead their inorganic growth ambitions. Prime yields are now hovering at between 5.25% and 5.65%, hence with a mix of equity and debt, reits would still be able to acquire accretively. With limited access to good retail assets in Singapore, given the tightly-held market and its stable nature, we believe sponsored reits would have an upper hand with the ability to tap sponsors’ pipeline for new assets to fuel their inorganic growth ambitions.

Stock picks. Within this space, we like MCT for its ability to continue to drive rental reversions as well as inorganic growth capacity from tapping its deep sponsor pipeline such as the recent maiden proposed acquisition of Mapletree Anson. In the small-mid cap space, we believe the completion of AEI works will continue to drive SGreit earnings while valuations at 0.8x P/BV and forward yield of 6%, which is higher than peers is attractive.