Singapore Property: Retail Rents Still Growing

- Positive economic factors and improving property fundamentals to underpin retail performance
- Suburban rents to trend upward, Orchard Road rents stabilizing
- Prefer suburban plays. Our picks are FCT and CMT

Steadily growing. The retail property sector is likely to see another year of strong performance as easing supply and rising consumer confidence, coupled with the recovery in economic activity boost domestic demand. The two integrated resorts should continue to support tourist arrivals resulting in a positive knock-on impact on the retail sector, with increasing shopper footfalls. Supply outlook looks more manageable after the completion of 2.6msf (average 1.3msf p.a.) of retail space over 2009/2010, falling to 0.9msf p.a. over the next 2 years. Although new supply is skewed towards the suburban areas, we remain positive in this segment and expect rents to continue rising due to strong GDP growth and low unemployment rate.

Fundamentals still strong. We note that over 90% of CMT and FCT leases have step up and gross turnover clauses, which will support rental growth. GTO contributes about 3-5% of their revenue and landlords should be able to enjoy a straight pass through to their bottom-line. Earnings upside should also come from positive organic rental growth. Last year, CMT and FCT saw positive rental reversions of between 6.5% and 7.2% compared to the preceding rents in FY10 and we believe they should be able to achieve similar performance this year underpinned by the favourable environment.

Prefer suburban plays. We continue to like retail reits as the sector is largely less vulnerable to policy risks and external shocks compared to the other property sectors. We favour the suburban retail sector backed by the more resilient nature of nondiscretionary consumption, a growing population and rising incomes. Our retail landlord picks are FCT and CMT.

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