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Outlook for retail REITs positive despite softening retail market

The softening retail market in Singapore could start to hurt retail landlords. However, despite a challenging outlook, some analysts said they expect the retail REITs sector to stay resilient.

SINGAPORE: The softening retail market in Singapore could start to hurt retail landlords and retail tenants. They have to cope with higher costs arising from restrictions on foreign labour, and at the same time battle slowing sales, as a result of falling local and tourist spending.

To make the outlook even tougher, new mall supply is coming on over the next two years. Analysts said these factors have made it more difficult for retail landlords to raise rents.

Take for example mall landlord CapitaMall Trust - Singapore's largest real estate investment trust (REIT) by market capitalisation and asset size. According to a recent report, its tenants' sales per square foot decreased by 3.7 per cent year-on-year in the second quarter of 2014.

Mr Derek Tan, an analyst at DBS Group Equity Research, said: "Landlords during the quarter have also given feedback that tenant negotiations have taken a bit more time, and there is a bit more pushback in terms of their ability to want to raise rents further, going forward.

"With supply also coming onstream over the next one or two years, retail landlords are very aware that the situation might get worse, but in all, I do not expect rental renewals to be negative."

DBS sees rent reversions to be in line with the inflation rate, expected to grow at about 2 per cent per year, down from rent increases of 5 to 15 per cent seen in previous years.

Despite the odds, some industry watchers said there is reason to expect that the retail sector will be able to hold up. According to OCBC, the recent slack in shopper traffic and tenant sales is likely to be temporary, as it was due to ongoing mall renovation works, and regional political events that kept tourists away.

"Our preferred picks for the retail sub-sector would be Frasers Centrepoint Trust, Starhill Global REIT and CapitaMall Trust. All these names have very clear growth drivers, strong financial positions and relatively attractive valuations," said Mr Kevin Tan, an investment analyst at OCBC Investment Research.

Two major REITs - CapitaMall Trust and Frasers Centrepoint Trust - recently reported rent reversions of 7 to 8 per cent. Morgan Stanley said this points to a healthy pipeline of retailers looking to expand in Singapore, despite falling aggregate spending from both Singaporeans and tourists.