UBS cuts DPU forecasts for retail Reits by 30%

Business Times - 17 Feb 2009
UBS cuts DPU forecasts for retail Reits by 30%
It sees retail sales here sliding 4-5%; rents falling due to space oversupply
By UMA SHANKARI

(SINGAPORE) Retail sales here could slide 4-5 per cent this year, says UBS Investment Research, which has also cut its distribution forecasts for Singapore's retail trusts by up to 30 per cent.

After several downgrades, UBS economists now expect Singapore's GDP to shrink 3 per cent and inflation to fall to 0-1.5 per cent this year, saying that this will hit retail spending and rents.

In the past, retail sales correlated with GDP growth, UBS says. In the 2001 recession, they weakened 2.2 per cent, in line with a GDP contraction of 2.3 per cent. And rents in the central area fell 19 and 14 per cent in the 1998 and 2001 recessions respectively.

'As a recession of minus-3 to minus-4 per cent is expected for 2009, we expect retail sales to fall around 4-5 per cent before recovering to 3 per cent a year in 2010-2012,' UBS says in a report issued on Friday last week.

Previously, when retail sales declined during recessions, the supply of new retail space was limited, providing support for rents, UBS says. But, as well as the current weak economic climate, there is an unprecedented supply of new retail space coming up, especially in the Orchard Road area.

UBS reckons overall retail space supply could rise 11 per cent in 2009-2011, with Orchard Road supply up by 37 per cent.

'As a result, we now expect retail signing rents to fall 8 per cent in 2009-2010 in the suburban areas, and around 23 per cent in 2009-2010 in the Orchard Road area,' it says.

So far, Singapore-listed real estate investment trusts (S-Reits) have not seen a substantial drop in retail sales at their malls, UBS notes.

But discretionary sales could deteriorate, it says. 'We expect the impact to be limited for the suburban portfolios but materially negative for central area malls, mainly due to high supply.' Based on the current trade mix, UBS reckons suburban malls will be less affected by weakening retail sales.

With this in mind, it has cut its distribution per unit (DPU) forecasts for Singapore retail Reits by up to 30 per cent this year and 40 per cent in 2012.

UBS has 'buy' calls on four retail S-Reits - CapitaMall Trust, Suntec Reit, Starhill Global Reit and Frasers Centrepoint Trust.