Here’s Why Singapore Retail REITs Will Do Fine in a Post-COVID World

Here’s Why Singapore Retail REITs Will Do Fine in a Post-COVID World

The Fifth Person

It is no surprise that a pandemic like COVID-19 that forced us into our homes and hospitals would bring the retail sector to its knees.

Shopper traffic has dried up for countless stores and restaurants, and landlords are faced with several tenants who are unable to make rent. Many businesses have also permanently shuttered as they struggle to survive in a post-COVID world.

Source: Capitaland

Because of this, landlords like REITs have taken to reducing their dividend payouts in a bid to shore up cash during these tumultuous times.

For example, CapitaLand Mall Trust (SGX: C38U) reduced its Q1 2020 distributable income by 70.3% year-on-year — which would have been unwelcome news for many unitholders who rely on its quarterly dividends for income.

However, these are exceptional circumstances and the question looking forward is whether retail REITs in Singapore can recover or even succeed in a post-pandemic world.

Here’s why I think a handful of them will continue to do well.

1. Malls Are a Central Facet of Life in Singapore

Admittedly, there isn’t much to be found when it comes to the great outdoors in Singapore. We don’t have great beaches, quiet forests, or mountainside vistas for us to visit and while away our weekends.

What else can we do?

We flock to our comfortable, air-conditioned malls to escape the heat, shop, and sometimes marvel at the man-made wonders we created to replace our lack of natural attractions.

Source: Changi Airport | World’s tallest indoor waterfall at Jewel Changi Airport.

But for Singaporeans, malls are no longer just a place to shop.

They have become our shared space to dine, play, gossip and gather with our friends and families on any given day. For essentials, many simply head down to a mall that’s a stone’s throw away to pick up necessities and groceries, instead of waiting a few days for online deliveries to arrive.

And even when it comes to work, many of our offices are linked to shopping malls.

Moreover, suburban malls that are linked to public transport nodes are relatively resilient as they cater to a local catchment of residents who visit the mall as part of their daily routine on their way to work and home.

In this sense, Singapore’s retail situation is markedly different from the U.S. where people mostly drive to commute and an outing to the strip mall usually requires a special trip there.

2. Demand and Supply

As long as frequenting malls remain part of the local lifestyle, we’ll continue to see strong tenant demand for retail spaces at high-traffic malls. Historically, retail occupancy rates across Singapore have comfortably averaged above 90% over the past five years.

Source: CapitaLand Mall Trust 2019 annual report

Without a doubt, tenant demand and rental reversions will weaken in the short term due to COVID-19, but over the long term, we should see both recover — especially if a catchment area has a limited supply of retail space.

For example, an extremely popular high-traffic mall like VivoCity [owned by Mapletree Commercial Trust (SGX: N2IU)] has had an occupancy rate hovering around 99% over the last five years.

This is partly due to the limited supply of retail space in the Alexandra/Harbourfront area, and the fact that mall also serves as a gateway for locals and tourists travelling into Sentosa.

Overall, Singapore’s supply of upcoming retail space is expected to tighten moving forward.

The annual amount of new private retail supply is estimated to average 0.49 million square feet from 2019 to 2022, a sharp drop from 1.55 million square feet five years prior.

Source: CBRE

Overall, Singapore has about 6.3 square feet of retail space per capita which is moderate compared to the U.S., Canada, and Australia.

3. Click-And-Mortar

Quite clearly, one major threat that shopping malls face today is e-commerce. This shift to online retailing will be accelerated by COVID-19 as people are pushed to adopt digital channels for work and commerce due to lockdowns and movement restrictions around the world.

This shift can already be seen with century-old retailers like Neiman Marcus and J.C. Penny filing for bankruptcy in the U.S. as they struggled to deal with the double whammy of changing trends and a global pandemic.

In Singapore, we’ve seen the recent closures of Home-Fix, MPH Bookstores, and Crabtree & Evelyn among others.

But for every retailer struggling to keep up with the times, there are others who are embracing the new age of commerce and integrating online sales with their brick-and-mortar stores, i.e. click-and-mortar.

For example, French sporting goods retailer, Decathlon, allows shoppers to ‘click-and-collect’ their online purchases from a physical store.

Even Amazonthe pioneer of e-commerce, is moving into physical stores as it understands that the future of retail is a blended model between online and offline channels. Physical stores help to lower shipping costs and provide a convenient point to handle returns.

Imagine simply heading to a store to do an immediate exchange for a defective product (like the old days), instead of waiting for days to mail the item back and forth.

Twenty years ago, the website used to take a backseat to the brick-and-mortar store, but that model has now flipped around — physical stores are now acting as touchpoints that support a wider e-commerce storefront.

4. Experiential Retail

Alongside the rise of click-and-mortar retailers, shops and malls will also evolve to provide experiential retail concepts and activities to attract crowds.

For example, if you are a coffee lover, you may want to hang out at a Starbucks Reserve Roastery to experience how gourmet coffee is roasted, ground, and brewed from bean to cup.

Starbucks Reserve Roastery New York City
Source: Matthew Glac | Starbucks Reserve Roastery, New York City

Singapore doesn’t have a Starbucks Reserve Roastery yet, but we have four Starbucks Reserve coffee bars where you get to taste a selection of rare coffees and watch your barista craft your favourite brews.

Funan Mall – which reopened in June last year after a S$560-million revamp – features sports facilities like an indoor cycling track, rock-climbing wall, and futsal court. The mall also has a rooftop urban farm whose vegetables are used at its farm-to-table restaurant, NOKA.

Local fashion brand Love, Bonito (which started out online) offers an augmented reality walkway, infinity mirrors, and personal stylists at its physical store.

Swiss sewing machine brand Bernina offers sewing workshops and machine rental services for those who want to explore sewing as a hobby (which would hopefully entice you to purchase one of their $3,000 sewing machines down the line).

Savvy retailers understand that physical stores are more about customer engagement and curating an on-brand experience than chasing a sale. After all, if the customer is ever interested in buying anything, the website is only a click away.

This article first appeared on The Fifth Person and is part of a content syndication agreement between The Fifth Person and Seedly.

For our Stocks Investing and Stocks Analysis articles, the Seedly team worked closely with The Fifth Person, who is an expert in the field to curate unbiased, non-sponsored content to add value back to our readers.

The Fifth Person believes in spreading a message – that sound investment knowledge, financial literacy and intelligent money habits can help millions of people around the world achieve financial security, freedom, and lead better lives for themselves and their loved ones.

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