The sale of the retail malls under Mercatus Co-operative, a unit of NTUC Enterprise Co-operative, will be keenly watched, says DBS Group Research analysts Geraldine Wong and Derek Tan in a June 23 report.
On June 16, Bloomberg reported that the NTUC unit is exploring a sale of its retail malls, AMK Hub, Jurong Point, Nex and Swing By @ Thomson Plaza, for a sum of $4 billion.
“We are excited by this sizable opportunity, given the lack of tight ownership of retail real estate in Singapore,” the analysts write, calling the transaction a “landmark” one.
“With dominant attributes like being located in key transport nodes and positioned mainly in the ‘essential services’ sector, these malls have been proven to churn out resilient cash flows during testing times, and will attract robust interest,” they add.
In addition, the analysts note that operational performance has rebounded in FY2021 to around 96% of pre-Covid levels and should continue to head higher in FY2022.
As at FY2021, the malls under Mercatus generated total revenue of $323.7 million, 4% shy of the average revenue generated by these properties from FY2017 to FY2019.
“Assuming a 68%-70% operational margin, we estimate FY2021 yields to range between 4.3%-4.4% (pre-Covid yields were 4.6%-4.8%), which is at a similar level to recent transactions within the retail space,” the analysts write.
“Even during the Covid-19 period, revenues dipped by 17%, highlighting its resilience, despite mandatory rebates that landlords had to offer at the time,” they add.
Should the portfolio transaction materialise, a new record low will be set for retail mall transactions on current valuations.
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“This is a good 10-30 basis points (bps) below the latest precedent transaction for a similar large-sized dominant suburban mall, Jem mixed-use development,” Wong and Tan say.
“Jem was purchased in full by Lendlease Global Commercial REIT (LREIT) in 1QFY2022 at a cap of 4.4% (or 4.5% cap for the retail portion of the mixed-use development),” they add.
Transaction likely to attract local incumbents; CICT, FCT and LREIT to benefit
As real estate in Singapore is seen as a store of value, the transaction is likely to attract local incumbents with retail operator-backed sponsors, note the analysts.
This is given that “getting it right” in retail real estate is more about managing the property well rather than getting the timing of the real estate cycle right, say Wong and Tan.
“Given the sizable portfolio, we anticipate that listed REITs like CapitaLand Integrated Commercial Trust (CICT), Frasers Centrepoint Trust (FCT), and LREIT, working together with their respective sponsors or even developers like City Developments Limited (CDL) and Far East Organisation, will be keen to get their hands on this portfolio,” they add.
“This transaction is expected to support capital values for retail malls in the suburban space, with selected malls in CICT, FCT, and LREIT to benefit. As such, we anticipate it to support valuations, implying that net asset values (NAVs) should remain resilient,” they continue.
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Structural trend in place for suburban retail real estate
In their report, the analysts say the transaction may put a structural trend in place for suburban retail real estate.
“[This is] anchored by the ‘premiumisation of retail offerings’ supported by higher income growth in Singapore’s population in the long term and structurally higher traffic, given a new hybrid working trend,” they write.
“We are seeing this already in the numbers, with FCT reporting tenant sales from January to May that are, on average, 110% of pre-Covid levels,” they add.
As the analysts see FCT as a prime suburban retail peer for a potential cap rate transaction range for the portfolio with many cross similarities between the REIT and Mercatus’ portfolio, the analysts see value in FCT with the REIT trading at an implied cap at 4.5%.
“Historically, FCT’s implied cap (measured as net property income over enterprise value or NPI/EV) averaged [around] 4.9% from 2007 to present. More prominently, trading yields have compressed to below 5% since 2018 levels,” the analysts say.
“We note that the yield spread against SG 10-year bonds has historically been maintained at between 2.6 points and 2.8 points. Since the onset of higher interest rate expectations, the cap rate has compressed further to the mid-4% range, with the yield differential coming down to 2.6%,” they add.
They have maintained their “buy” call on FCT with a target price of $2.90.
“LREIT’s recent value-accretive pivot into the suburban retail space will drive a compression in yields over time,” they add.
Mercatus has combined assets under management (AUM) of over $10 billion, with retail and office assets in Singapore and Sydney, Australia.
According to consultancy firm Cistri, Mercatus is the third largest owner of retail assets in Singapore with an ownership of 5.2% by net lettable area (NLA). It also has a market share of about 9% in terms of Singapore’s suburban malls.
As at 4.20pm, units in CICT, FCT and LREIT are trading at $2.18, $2.25 and 79 cents.
