Singapore Retail REITs - DBS Research 2023-07-06: Ride On Recovering Rents

• Singapore’s retail scene has started its next lap of recovery as tourists return to shop, spend, and feast from 2H23 onwards. Tourist receipts have swiftly recovered to ~75% of pre-COVID levels in 4Q22 – a larger than proportional increase compared to arrivals (~50% of pre-COVID) – and is expected to improve.
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Time for rents to catch up as tenant sales recovery reduce occupancy costs.

• With tenant sales resilient at >120% of pre-COVID levels, we believe there is scope for rents to “play catch-up”, especially at selected dominant malls within some S-REIT portfolios.
• Our analysis shows that average suburban passing rents have recovered ahead of Orchard and CBD rents, to ~99% of 2019 average levels, versus 90% for Orchard passing rents and 87% for CBD passing rents, mirroring the trend in tenant sales performance.
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Sustained reversions of +5% to +7% to see full recovery in passing rents.

• The recovery in passing rents will ride on the upcoming lease renewal cycles. Passing rents have shown that the recovery of retail rents (passing) has not fully followed its course and remains one of the last hanging subsectors that’s yet to recover to pre-COVID levels; other sectors have managed despite the high level of inflation in Singapore over the past one to two years.
• The full recovery of passing rents will come in phases alongside the lease renewal cycle of an average retail lease of two to three years.
• We estimate that Orchard leases (~90% of normalised levels) will need another three years for its rents to fully normalise to +5% rental reversions, meaning that retail rents should continue to deliver upside in the coming two to three years and beyond.

Continue to prefer Suburban retail; top picks Frasers Centrepoint Trust & Lendlease REIT.

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Geraldine WONG DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2023-07-06 SGinvestors.io

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