Is there a disconnect between investors in retail assets via S-REITs and the tenants in REIT-owned malls? With a debate on local retail rents heating up, where should investors stand on the topic of higher or lower rents?
The retail trade be it via CapitaLand Integrated Commercial Trust(CICT), Frasers Centrepoint Trust(FCT), their respective sponsors CapitaLand Investment (CLI) and Frasers Property(FPL) or Lendlease Global Commercial REIT(LREIT) depends on the risk appetite, the REITs’ cost of capital, and their sponsors’ cost of capital.
FCT is pure-play Singapore dollar, Singapore suburban retail malls. CICT is mainly Singapore dollar focused Singapore retail play with office space, integrated properties and a smattering of overseas properties in the mix.
Interestingly, one of CICT’s properties, Gallileo is likely to be the home of the European Central Bank from next month onwards. And this is materialising just as the Euro and European assets are attracting attention. But that is another story and investing idea altogether.
How can landlords such as CICT, FCT and LREIT navigate the path between what their investors require and their tenants’ needs?
When The Edge Singapore puts this to Ervin Yeo, CLI’s group chief strategy officer and CEO, Commercial Management, CLI, he parries, pointing out that CLI and the CapitaLand Group are owner-operators.
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Yeo looks after commercial management across the assets – retail, office, business parks, logistics, whether the properties are in REITs, on balance sheet, in the funds or in partnerships.
Clarke Quay vs Boat Quay
“There are a lot of synergies to this model because we have multiple touch points for the relationship,” he answers. So, as an entity within the CapitaLand Group, the assets in the REITs, funds, and so on are able to reap economies of scale through lower operating costs, lower cost of capital and debt, and access to a wider pool of tenants. This differentiates malls in REITs versus strata malls and the small shop.
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Yeo cites CQ@Clarke Quay, an asset in CICT, and Boat Quay where the shophouses are owned by different entities as an example. “Boat Quay represents a lot of individual owners who pick a certain trade (for a tenant) based on who can pay more,” Yeo says. That may imply that Boat Quay shophouses could end up with a lot of similar trades next to each other, similar to a strata mall.
Clarke Quay is known for its nightlife. Zouk, the nightclub is at Clarke Quay. "We are shifting the centre of gravity for the partying (nightlife) to the left,” Yeo says. CanningHill Piers, a residential development, a Somerset-branded serviced residence owned by CapitaLand Ascott Trustand Moxy, a hotel owned by CDL Hospitality Trustsare to the right of Clarke Quay.
“CanningHill Piers is our development. On the right, nearer CanningHill Piers is lifestyle, where your NTUC Fairprice, Swee Lee etc are situated. We are taking into account overall estate planning. If I keep all the clubbing there, you're setting yourself up for failure,” Yeo explains. The Swee Lee at Clarke Quay allows customers to listen to vinyl records at the cafe, try out the guitars, that sort of thing. “Every time I go to Swee Lee, I feel happy, because it tells us that if you get the right tenant, the right crowd will come,” Yeo remarks adding that he views tenants as partners.
REITed malls vs non-REIT retail
The criticism here is that REITed malls are similar to each other – the word cookie cutter has been bandied around.
“Most assets that are investable are already in REITs. If you're already in a REIT, everyone has a similar starting line and end line. A rent that the FPL group cannot accept is also a rent that CLI is unable to accept. There is order to the market, because once you're in the REIT, you've got similar capitalisation rates; you're facing the same investor base. Your DPU is similar. Your properties are close to each other,” Yeo points out.
In a Linkedin post released on June 9, Yeo refers to metrics such as occupancy cost and rental reversions to illustrate the order in the market.
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Occupancy cost (OC) is total rent as a percentage of total sales; the lower the number the better. In the post, Yeo says “If your rent is $2,000 a month and your total sales is $10,000 a month, then the OC is 20%”.
In FY2024, CICT’s OC was 17.1% and FCT’s was 16%. FCT has a September year-end. Yeo goes on to say that OCs vary according to the trade (some trades have higher margins and so can stomach higher OCs, whereas trades like supermarkets and electronics generally need single-digit OCs).
“This suggests that the revenues of our tenants are at a sustainable level relative to their rents. In particular, the OC for the F&B trade category across CL malls is still less than 20%, which is also lower than before Covid. OC is an efficiency measure and a proxy for rent affordability,” Yeo writes in his post.
OCs can also vary significantly between retail types, e.g. operated malls, strata malls, shophouse units and so on. “In China, the 20% OC line is an important one because the commission for online platforms like Taobao and Pinduoduo have reached those levels, so a number of retailers find that it is starting to make sense to explore offline retail stores where they don’t have to top up extra to the online platform to boost their listings,” Yeo writes.
The point here is that there is a cost for online ecommerce platforms – they have to pay for being boosted, for banner ads, for logistics, for returns and so on.
“Logistics was a great growth sector in China for the past few years. Taobao has this very interesting model, which is no questions asked, free returns within seven days. So as a merchant, if I list on Taobao, I offer seven days, no questions asked returns, or should I go elsewhere because the cost is borne by the merchant?” Yeo observes.
Free returns become behavioural as e-shoppers are unlikely to go to a platform with no free returns within seven days.
Yeo’s point is that in China – which is a leader in ecommerce – as online OCs approach physical OCs, retailers may decide a physical store is just as feasible.
Malls in REITs have costs – maintenance which requires operating expenditure and AEI (asset enhancement initiatives) which require capital expenditure and which may reflect in some of the operating costs. However, better toilets, security, landscaping, carpark, etc. are the nitty gritties that mall tenants don’t have to deal with. “There’s rent, and there’s what you get with the rent,” said Yeo.
Since both CICT and FCT have similar OCs – despite CICT owning downtown malls such as Plaza Singapura and Bugis Junction (ION Orchard was acquired from CLI at end-Oct 2024), their sales to rent ratios don’t deviate much from each other.
The benefit of being in a REIT is perpetual capital. “For CICT and CapitaLand Ascendas REIT, we hold the assets effectively, in perpetuity. Certainly REITs sell assets, but it's not something that's common. Once you are holding it for long term and you have a sufficient runway for your lease, then it's easier to justify capex. Capex is what differentiates Funan from Adelphi, ION from Lucky Plaza,” Yeo says.
Stable growth
In his Linkedin post, Yeo highlights that the private-sector rental index for retail space remains below pre-Covid levels. Rents in the central region are down 22.1% between 4Q2019 and 1Q2024; and rents in the city-fringe areas are 24% lower between 4Q2019 and 1Q2024. Rents for the central area crept up by 0.4% between 1Q2024 and 1Q2025.
“For CapitaLand’s malls, we want to see rental growth that is in line with sales growth - since 2018, the CAGR (compound annual growth rate) of tenant sales psf has been +1.9%, while rental growth has been +0.7%,” Yeo writes, showing that growth in tenant sales has outpaced the growth in rents.
Rental reversions is the other much-watched figure by analysts and investors. In FY2024, CICT’s rental reversion was 8.8%. Rental reversions are computed based on the average rent of the new incoming lease contract versus the average rent of the previous outgoing lease contract of the same unit. It includes renewals of existing tenants. CICT’s typical lease term is 3 years. On average, around 25% to 30% of leases are renewed/changed a year. Based on these figures, for a rental reversion of 8.8%, the rent for the whole mall – or rather the portfolio – would have increased by 0.75% in 2024.
“The whole point of REITs is to deliver stable returns over time,” Yeo says. On this score, there isn’t a disconnect between tenants and investors – happy tenants equate to happy investors.
In FY2024 CICT’s DPU rose by 1.2% y-o-y to 10.88 cents while in FY2023, DPU rose by 1.6% y-o-y to 10.75 cents. FCT’s DPU was very marginally lower in FY2024, by 0.89% y-o-y to 12.042 cents. In FY203, FCT’s DPU slipped a little to 12.15 cents, but FY2022’s DPU grew by 1.5% to 12.23 cents.
Will the Johor-Singapore Special Economic Zone upset the Singapore order in the retail space? "When I was in China, we (Raffles City Shenzhen) were the Johor, trying to pull the Hong Kongers over. We were playing offense then. Now I have to learn to play defense," Yeo says.
Stay tuned.
