Why renewed interest in Orchard Road spells good news for S-REITs

Potential buyers are waiting for a clear turn in prime retail rents.

Investor confidence in Singapore’s prime retail assets is surging, driven by the record-breaking deal that highlights the scarcity and long-term value of Orchard Road malls, a report by DBS said.

ION Orchard’s $1.85b sale of 50% of its stake has set a new benchmark at $5,928 psf at 4.9% yield—an unprecedented price for a trophy retail mall. This was quickly followed by a privatisation offer for Paragon REIT, implying a valuation of $4,500 psf at a 5.2% yield for Paragon Mall.

DBS said that potential buyers are watching Orchard Road malls, awaiting a clear turn in prime retail rents – which are currently 4% below pre-pandemic levels, with further room to recover.

“The resurgence of luxury spending is key to sustaining growth in the S-REITs we cover that have c.40% or more exposure to luxury Orchard Road malls,” analysts Geraldine Wong and Derek Tan said.

Consumer sentiment has yet to fully recover, and they note that price harmonisation by international luxury retailers, a weaker SGD (attracting tourists), and a return of regional consumer confidence should strengthen Orchard Road’s position as a luxury shopping street in Asia.

“As investment interest soars back to new heights for Orchard Road malls, investors are adopting a longer-term investment horizon, anticipating a full recovery in tourist traffic and improved local consumer sentiment to drive luxury spending. Luxury brands remain the heartbeat of prime Orchard Road malls, with luxury malls such as Paragon Mall deriving as much as over 40% of its gross rental revenue from high-end luxury tenants,” the analysts noted.