On 3 Apr 2020, the Singapore government announced stricter measures to combat the Covid19 virus. I believe that the measures have been adequately covered by the news media (CNA Report on new measures) so won't be repeating them here. Instead, I will be providing my 2-cents worth on how this might impact the market.
Firstly, I expect retail sales to continue to suffer the brunt of the advisory to stay home. It was reported yesterday that retail sales in Singapore fell 8.6% yoy as a result of declining sales activity in discretionary items like watches & jewellery. As expected, consumer staples saw a 15.5% improvement due to panic buying when the Singapore government declared DORSCON Orange.
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| Y-o-y change in retail sales (Source: The Straits Times) |
Second, as most retail outlets will be closed during this period, F&B retailers (and subsequently, retail landlords) would be hit. Listed food retailers like Jumbo, RE&S, Koufu and Japan Food Holdings are likely to be negatively impacted by the lower footfall at malls and prohibitions on eating out. In particular, Jumbo, with a heavier reliance on foreign tourist traffic, could be the worst performer out of all. Retail landlords with assets in prime locations can expect ghost towns in their malls other than the basement where supermarkets tend to be. REITs with prime location exposure include Starhill Global (Ngee Ann City, Wisma Atria), Suntec REIT (Suntec City), SPH REIT (Paragon) and Capitaland Mall Trust (Plaza Sing and Raffles City). REITs with suburban exposure will also be hit badly but to a smaller extent as residents would still patronize malls nearer their homes for essentials.
Most retail landlords have already committed to giving rental rebates and deferments to tenants affected by the Covid19 virus and this will negatively impact distributions and payout ratios in the near term. We have seen this with SPH REIT recently slashing their payout ratios despite having a higher Distributable Income. The need to conserve cash for the long run for business survival takes precedence over the short term dividends to shareholders. In the longer term (when this blows over), landlords could also find it more difficult to have positive rental reversions as tenants continue to recover from the ill effects of Covid19.
Thirdly, the closure of office premises could be a bane for office landlords. In the short run, income is unlikely to be significantly impacted as leases tend to be signed for 3-5 years and tenants for Office REITs tend to be larger business entities with greater ability to ride out the crisis. However, in the longer run, many businesses could view flexible working arrangements as a viable option thus reducing the need for office space expansion once their lease terms are up. Additionally, the more tepid economic environment could lead to business contraction, further reducing the need for additional office space.
Overall, in terms of sector preference for REITs, it would generally be based on average WALEs; sectors with longer WALEs could ride out the storm in better shape than the rest.
1. Industrial/Healthcare
2. Office
3. Retail
4. Hospitality
Industrial and Healthcare REITs take joint first due to the long WALEs of their tenancies. I do not believe that Healthcare REITs would significantly outperform Industrial due to the fixed master lease structures in place; no significant upside from increased hospital revenues as the REITs are merely landlords collecting fixed rent.
REITs with data centre exposure like KDCREIT and MINT are getting lots of love in this environment as leases here tend to be ~7 years at least and DCs are also seen as a beneficiary as the virus forces digital transformation upon many firms. Similar to healthcare REITs, DC landlords do not directly benefit from increased revenues of their tenant. In the longer run as leases expire, landlords are likely to be able to achieve positive rental reversions if their tenants do well.
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