[SINGAPORE] Renewed investor interest in Orchard Road’s trophy malls is a positive for Singapore-listed real estate investment trusts (S-Reits), said analysts from DBS.
This comes as markets are undervaluing prime central assets owned by S-Reits, said analysts Geraldine Wong and Derek Tan on Thursday (Mar 13).
“With retail-focused Reits trading below book value, current trading levels are undervaluing quality central malls,” they said.
Developments including the “landmark” sale of a 50 per cent stake in Ion Orchard to CapitaLand Integrated Commercial Trust (CICT) and Cuscaden Peak’s bid to privatise Paragon Reit at S$0.98 apiece are driving this revived interest, they added.
The analysts named CICT and Lendlease Global Commercial Reit (Lendlease Global Reit) as top picks among S-Reits with central exposure, assigning both a “buy” rating and price targets above current prices.
CICT was assigned a price target of S$2.30, above its current S$2.08 price, and Lendlease Global Reit was given a S$0.75 price target, more than its current price of S$0.50.
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Given Lendlease Global Reit’s current price-to-book ratio of 0.66 times, it could emerge as a potential privatisation candidate for its sponsor, or elicit third-party interest if its valuation persists at this level, said the analysts.
“We believe that its Singapore-centric profile and quality asset portfolio should appeal to investors looking to enter Singapore’s retail scene,” they added.
Meanwhile, Wong and Tan believe CICT stands out for its central assets’ “superior” retail yields of 9.5 per cent.
“This yield remains superior to that of its peers, reinforcing CICT’s position as our top pick within the retail S-Reit space for central retail exposure,” they said.
Ion Orchard and Paragon deals could boost investment appeal
The landmark sale of Ion Orchard’s stake and Paragon Reit’s privatisation offer signal that investor confidence in Singapore prime retail assets has reached new heights, they said.
The S$1.85 billion sale of a 50 per cent stake in Ion Orchard implies a S$5,928 per square foot (psf) price tag, which is unprecedented for a trophy retail mall and represents “top dollar for a top asset”, said Wong and Tan.
They highlighted that the privatisation offer for Paragon Reit implies a price of around S$4,500 psf, and a 5.2 per cent yield for its anchor asset Paragon mall.
“The privatisation offer from Paragon Reit’s sponsor and managers, at S$0.98 per share in cash, values the Reit at around price-to-book ratio of around 1.07 times, in line with past privatisation or mergers and acquisitions offers in the Reit space,” they said.
“Should the privatisation offer go through, these two landmark deals will further consolidate ownership of Orchard Road malls, reinforcing their scarcity value and long-term investment appeal,” they added.
Rental recovery could come soon as luxury spending makes comeback
While passing rents in Orchard Road are still currently around 4 per cent below pre-pandemic levels, rental recovery could be on the horizon, said the analysts.
“We expect this rental gap to close soon, as central landlords are still experiencing strong reversionary momentum for central lease renewals… on the back of a tight retail supply landscape along Orchard Road where luxury tenants are anchored in, and returning footfall and luxury spend,” Wong and Tan said.
Potential buyers watching Orchard Road malls are looking out for a “clear turn” in prime retail rents, they added.
“The resurgence of luxury spending is key to sustaining growth in the S-Reits we cover that have around 40 per cent or more exposure to luxury Orchard Road malls.”
This is because luxury brands are the “heartbeat” of Orchard Road malls. Luxury malls such as Paragon mall derive more than 40 per cent of gross rental revenue from high-end luxury tenants.
As investment interest soars back to new heights for Orchard Road malls, investors are adopting longer-term investment horizons and expecting a “full recovery” in tourist traffic, alongside improved local consumer sentiment to fuel luxury spending.
And while consumer sentiment has yet to fully recover, the analysts think that price harmonisation by international luxury retailers, a weakened Singapore dollar drawing in tourists and a return of regional consumer confidence “should strengthen Orchard Road’s position as a luxury shopping street in Asia”.
