Cap rates remained largely stable.
According to CIMB, there are several key trends among the retail REITs’ latest quarterly results, including: 1) interest rates were unchanged from the previous quarter, 2) cap rates remained largely stable, 3) the rising
labour cost continued to limit the expansion and operational plans of certain retailers, and 4) positive rental reversions were still achieved.
Interest rates. Interest rates. In 4QCY13, the all-in interest costs for all four retail REITs under our coverage (CMT, FCT, MCT and SGREIT) remained unchanged qoq. Although interest cost has risen yoy, the short-term interest rates remained the same qoq, allowing the retail REITs to continue enjoying low borrowing costs.
Cap rates. The reported cap rates for all the REITs were unchanged in 4QCY13, with the exception of SGREIT that reported a 25bp drop to 5.0% for Ngee Ann City.
On the back of a potential further tightening of liquidity coupled with a rising interest rate environment, we believe cap rates are unlikely to see further substantial compression, though capital value of the respective properties may continue to rise, reflecting stronger rents.
Labour costs continue to be the key grouse among Retail REITs, particularly the tenants who are thinking of expanding and/or those in the service sector (for example, F&B). These tenant groups are increasingly relying on technology and innovative methods, such as taking orders on PDAs, to save on labour costs.
Rental reversions. In 3QCY13, the Singaporean retail REITs continued to achieve stable rental reversions (on the back of growing tenant’s sales ranging 2.5% -20%) in the range of 6.1-7.5% yoy – which translates to an average of 2.0-2.5% per annum (with the exception of VivoCity that achieved an impressive 38.7% yoy).
This level, which is consistent with the historical average are deemed to be sustainable (management of MCT has guided rental growth to slow down).
Going forward, prime retail malls, which act as a proxy to tourism growth in Singapore, may post positive surprises if visitor arrivals number surpass the forecasted CAGR of 4.7% over the next two years; on the back of global economy recovery and rising number of MICE.
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