Will retail Reits suffer under Singapore’s new tenancy code?

• New guidelines on the leasing of retail premises may be made into law soon
• The changes could reduce rental income upside for retail S-Reits
• CapitaLand Integrated Commercial Trust (SGX: C38U) share price hits S$2.19
• Frasers Centrepoint Trust (SGX: J69U) rises 1.6% to S$2.50 per share
• Trade Singapore retail Reits with an IG account

New tenancy code: What are the highlights?

Singapore’s major retail tenants and landlords have committed to abide by the new code of conduct for fair tenancy by 01 June 2021.

Adoption of the guidelines, announced in late March, is currently voluntary, but could be made mandatory via legislation in the coming months.

The code enables fairer negotiations in 11 areas, such as rental structure, exclusivity clauses, pre-termination by tenant, and sales performance.

One change is that the rental formula must be based on a single computation, which means it must not contain an “either/or, whichever is higher” formula.

Tenants can also exit leases early if their business principal is insolvent or if it loses franchise rights.

How might the guidelines affect landlords?

Citi analyst Brandon Lee said the code of conduct may transfer some bargaining power from retail landlords to tenants.

The single-formula rental structure will dampen rental income upside, and pre-termination clauses could affect malls’ sales productivity, Lee said, although turnover rents contribute only 3-5% of rental income.

RHB similarly predicted the single-rental computation could shave off some upside that landlords enjoyed in the past. ‘Anecdotally, we believe such leases are a small portion of overall leases, at less than 5%,’ RHB analysts said.

Furthermore, the code will limit landlords’ ability to unilaterally terminate leases of certain underperforming tenants and tweak their tenant mix, according to RHB.

Citi’s Lee said: ‘Overall, the move exacts a toll on an already-tough retail operating environment, but we see a more palpable impact on less-prime malls.’

RHB sees the guidelines as a ‘slight negative’ to retail Singapore-listed real estate investment trusts (S-Reits). Although the move may not significantly impact their earnings, it will likely reduce their rental rate growth potential in the longer term, RHB added.

What is the outlook on retail S-Reits’ shares?

RHB’s mid-cap pick is Starhill Global Reit (SGReit), with a ‘buy’ rating and S$0.60 target, as it is trading at a ‘deep discount’ compared to peers. SGReit shares jumped 1.8% to S$0.57 last Thursday.

Suburban mall landlord Frasers Centrepoint Trust (FCT) garnered 13 ‘buy’ calls and six ‘hold’ recommendations with an average target price of S$2.76, Bloomberg data showed. FCT ended Thursday at S$2.50 per share, up 1.6%.

CapitaLand Integrated Commercial Trust (CICT), Singapore’s biggest mall owner, is a ‘buy’ idea for 14 out of 18 analysts, with the remaining four giving ‘hold’ calls. Their average target price was S$2.43. CICT’s share price gained 0.9% to S$2.19 on Thursday.

SPH Reit garnered a S$0.88 fair-value estimate from OCBC and a S$0.80 target from Maybank, both with ‘hold’ ratings. Its stock was flat at S$0.875.

Mapletree Commercial Trust (MCT) attracted six ‘buy’, six ‘hold’ and two ‘sell’ recommendations with an average S$2.14 target, Bloomberg data showed. MCT shares advanced 0.5% to S$2.13.

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