In our story, “Will China’s bazooka save the luxe sector?”, we suggested one way to play the Chinese recovery is through resilient luxury stocks such as LVMH and Prada.
For risk-averse investors focussed on yields, S-REITs with luxury properties are a proxy for the Asian and Asean growth story. As the popularity of Singapore’s most iconic shopping belt remains undiminished, investors need look no further than Orchard Road.
“An icon of Singapore, investor interest in Orchard Road remains evergreen. Even assets on its fringes continue to draw interest from various investors. Land tenure is always a concern, but given the stability in Singapore, investors are getting used to the idea. For funds new to Singapore, the limited tenure may be an issue, but if it is a captive asset, it matters less,” notes Chiam Tao Koon, Ashurst’s Southeast Asia head of M&A.
In September, Chiam led a team for the sale of a $1.6 billion portfolio of industrial assets held by Soilbuild Business Space REIT to a Warburg Pincus-Lendlease JV platform focussing on life sciences and R&D real estate.
To date, the largest transaction along Orchard Road is none other than ION Orchard, whose 99-year leasehold land tenure started in 2006. Valued at about $3.7 billion, CapitaLand Investment (CLI) has proposed to divest its 50% stake in ION Orchard to CapitaLand Integrated Commercial Trust C38U C38u (CICT). In turn, CICT’s manager proposed that the REIT acquire it at an agreed value of $1.85 billion. An EGM by CICT’s independent shareholders to approve the transaction, where CLI cannot vote, will be held on Oct 28.
Based on a net lettable area of 623,600 sq ft and the agreed valuation of $3.7 billion, ION Orchard is valued at $5,928 psf. “Considered as one of the best and most visible malls along the street, the agreed price will make it one of the priciest retail malls on a Singdollar psf basis to be transacted, justified by its trophy status,” DBS Group Research said in September.
See also: MLT to divest two properties in Japan for JPY4.3 bil
ION Orchard’s pricing isn’t much higher than that of another office transaction along Orchard Road. The Hour Glass AGS Ags has announced it plans to buy a few office units in Tong Building, with a total area of 13,734 sq ft, for $68.5 million. This translates to $4,980 psf. Tong Building sits on freehold land.
“The acquisition of the property is part of the group’s strategy to invest in high-quality assets which will complement the group’s commercial properties in the region and have potential for its own use,” The Hour Glass said in a statement on Sept 26.
ION: more than just luxury
See also: Elite UK REIT to divest Hilden House for GBP3.3 mil
In an interview in September, Tony Tan, CEO of CICT’s manager, said ION Orchard is more than a luxury mall. “ION Orchard is not just a luxury mall. I also hang around the basement. The basement connection [to the MRT] will always be a volume game and is busy most of the time. Anything above the basement levels is cyclical. Sometimes the wealthy spend $1 million [in one go], but it won’t happen every day,” Tan describes. He adds that the brands are there to project their branding, and that’s where ION Orchard stands out.
According to the circular for the EGM, which will be held on Oct 28, ION Orchard is home to 300 international and local brands across the luxury and necessity retail segments. ION Orchard also offers multi-sensory experiences via the ION Art Gallery and ION Sky. One of the most crowded areas is Basement 4, which has many food offerings.
According to the circular, luxury brands appear to have an affinity for ION Orchard because of its design, which maximises shopfront visibility. This allows the property to command premium rent and makes it one of the prime choices for luxury retail brands.ION Orchard’s catchment comprises 20,000 residential units in its vicinity; the property saw 4.3 million tourists in 2023, and 160,000 commuters pass through Orchard MRT daily.
ION Orchard’s connection to the Orchard MRT Interchange Station drives footfall into its basements. While some market watchers argue that the Thomson-East Coast Line connection could cannibalise shoppers as it connects directly to the RTS or rapid transit system, taking them to Johor instead, the offering in Johor is quite different to ION Orchard. Additionally, ION Orchard Link, an underground pedestrian link with retail offerings, connects ION Orchard to other parts of Orchard Road.
“We have wealthy customers from China doing shopping. But the trend is also of new residents here coming to ION Orchard, and that base will go up. Singapore’s economy is not fully dependent on China. Our catchment in terms of a business and financial hub is focussed on Southeast Asia. Southeast Asia is growing in importance given heightened geopolitics,” Tan explains.
Sulian Tan-Wijaya, executive director of lifestyle and retail at Savills Singapore, concurs. “The luxury customers pre-pandemic came largely from China. Their much-hoped-for and anticipated return post-pandemic did not materialise, with China’s weakening economy and many wealthy Chinese preferring to shop in Europe or Japan. Instead, we see more local and regional shoppers from Indochina and Indonesia shopping in our upscale malls.”
Tan reasons that as a wealth management hub, managing wealth will grow along with the growth in Southeast Asia. “For Malaysians, Thais and Vietnamese, Singapore is an important centre for them. Our market dynamics are different. Our domestic population is fairly stable, with low unemployment. The job variety is a lot wider with many professional services, and on a net basis, Singapore will benefit,” Tan continues.
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The popularity of ION Orchard among investors was evident. CICT financed the proposed acquisition of $1,107.3 million in an equity fundraising, comprising a placement raising $350.3 million and a preferential offer raising $757 million. Both tranches were well oversubscribed.
The case for luxury malls in Singapore
According to Jelena Sokolova, senior equity analyst at Morningstar, sales of luxury items by companies in Asia-excluding Japan and in China specifically, came under pressure. “Chinese consumer buying was stronger than sales in China might suggest, as buying shifted to Japan to take advantage of the weaker currency,” she says.
“Although several luxury brands have seen their sales decline this year, several continue to perform well, including Hermès, Chanel, Loewe, Loro Piana, Brunello Cucinelli, Prada and Miu Miu. Even lesser-known brands like The Row and Khaite have become popular due to the ‘quiet luxury’ movement that took over the post-pandemic revenge spending, where consumers [had] flaunted their luxury purchases and splurged on Rolexes,” observes Tan-Wijaya.
Singapore property is at the pole position for luxury brands looking to serve the wealthy. “Singapore reported a US$120 billion ($158 billion) surge in financial assets booked from overseas in 2023, according to a July BCG report. The number of single family offices set up by the ultra-rich has been growing yearly, reflecting Singapore’s appeal as a favoured location for wealthy overseas families to park their wealth. This inflow of wealth and jobs created can only bode well for luxury retail,” Tan-Wijaya elaborates.
In addition, Singapore is viewed as a safe haven with its political stability and the ultimate safe haven currency — the Singapore dollar, notes Koh Shern-Ling, portfolio manager, real estate at Principal Asset Management. “Singapore has solid attributes of being a safe haven. It’s a benefit because we’ve seen inflows to physical property assets. We saw family offices buying buildings here for cash as late as mid-last year.”
Other local icons
CICT isn’t the only REIT with an Orchard Road icon. Paragon REIT owns Paragon. As of June 30, the property was valued at $2,825 million, or $3,933 psf. ION Orchard’s net property income (NPI) yield is 4.9% based on its transaction price, compared to Paragon’s 4.86% based on its NPI of $68.7 million in 1HFY2024. Both REITs have December year-ends. In 1H2024, Paragon’s rental reversions topped 22.5%. Altogether, its Singapore properties, including The Rail Mall, reported reversions of 21.6%.
Paragon REIT’s performance continues to be negatively impacted by its two Australian properties, which reported negative rental reversions and lower y-o-y valuations. Westfield Marion also reported lower y-o-y revenues and NPI in 1H2024. (S-REITs’ moves overseas have mainly been a negative experience for investors.)
In June, Paragon REIT announced the sale of The Rail Mall for $78.5 million, above its latest valuation of $62 million and its purchase price of $63.2 million in 2018. The Rail Mall’s land tenure is less than 22 years. Given the limited life of the property, the sale of Rail Mall at an NPI yield of around 8% is tight compared with its NPI yield (in 1HFY2024) of more than 10%. Yet again, this is an indication of the demand for Singapore properties.
Arguably, the luxury mall The Shoppes at Marina Bay Sands appears to be impervious to the slowdown in Chinese spending. In 2Q2024, The Shoppes at Marina Bay Sands announced occupancy of 99.9%, operating margins of 89.7%, gross revenue of US$58 million, and operating profit of US$52 million. Its trailing-12-month (TTM) revenue has stayed consistently high. Although the TTM revenue in 2Q2024 of US$261 million was only marginally higher than in 1Q2024, it is up 12.5% y-o-y.
”Here in Singapore, malls like Marina Bay Sands have continued to elevate their positioning even higher than pre-pandemic times, targeting the highest tier of luxury shoppers. We also see a trend where top luxury brands seek to open ultra-luxury concept stores or maisons to cater to their Top 1% or VVIP customers,” Tan-Wijaya says.
“Local assets, including office and high-end luxury retail, should continue to benefit from structural regional themes. REITs are derivative plays of that. However, interest rates need to come down further to offset local assets’ low capitalisation rates. Then, we can get a re-rating for S-REITs,” Koh says.
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