How Singapore's retail sales affect SPH REIT

Rent price is driven by rental reversion and retail sales.

SPH REIT's price is strongly correlated to Singapore's retail sales, DBS Group Research said.

According to the brokerage firm, the rental performance of the two properties Paragon and Clementi Mall in the portfolio, predominantly the former, is a good representation of investor’s perception and confidence in the direction of the Singapore retail market.

"Singapore Retail Sales and SPH REIT’s rental reversion rates are in turn strongly correlated with a high coefficient of 0.80 which can be explained by the greater willingness for merchants to renew their tenancies at a higher rent once they observe positive retail momentum in the previous rental cycle," DBS Group Research said.

Meanwhile, the higher correlation coefficient of SPH REIT’s price and STI reaffirms the above finding that SPH REIT is more of a retail proxy than a real estate proxy.

"As such, Singapore retail trend and SPH REIT’s rental reversion are factors that need to be closely monitored," the brokerage firm noted.

On the other hand, it also noted that SPH REIT has no meaningful connection with tourist arrivals.

"Despite the lack of official data, the REIT’s management estimates that approximately 75% of the spending at Paragon is made by local shoppers, whereas overseas shoppers count for less than a quarter," DBS Group Research explained.