[SINGAPORE] The revival of investor interest in Orchard Road’s trophy malls, driven by Ion Orchard’s 50 per cent stake sale and Paragon Reit’s privatisation offer, is a positive for Singapore-listed real estate investment trusts (S-Reits) such as CapitaLand Integrated Commercial Trust (CICT) and Lendlease Global Commercial Reit (Lendlease Global Reit), said analysts from DBS.
This comes as markets are undervaluing prime central assets owned by S-Reits, said DBS 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.
Among S-Reits with central exposure, they named CICT and Lendlease Global Reit as their top picks, assigning both with 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, above its S$0.50 current price
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.
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“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.
Rents under pre-pandemic levels, with recovery room
Passing rents in Orchard Road are still under pre-pandemic levels, but this gap will likely close soon, noted the analysts.
Potential buyers are watching Orchard Road malls and looking out for a clear turn in prime retail rents which are currently around 4 per cent below pre-pandemic levels, with further room to recover, 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,” they said.
While consumer sentiment has not yet fully recovered, 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”.
