Retail REITs are REITs that hold properties such as shopping centres, malls, shopping arcades and other premises meant for retail activities.
Properties under Retail REITs can be located either in metropolitan city centres or suburban neighbourhoods and they usually exist as an integrated project consisting of not only retail outlets but other amenities such as bowling alleys, cinemas and skating rinks as well.
Prominent Retail REITs in Singapore include Capital Commercial Trust which holds Tampines Mall, Junction 8 and Clarke Quay amongst others.
Performance of a Retail REIT
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Among REITs categories, performance of Retail REITs are probably be the easiest to gauge. All an investor needs to do to have a feel of how well his investment in a Retail REIT is doing is to walk into a shopping centre or mall that is under the management of that REIT.
The human traffic and level of buzz going on in the mall is a dead give away of how well your investment is doing in the REIT.
But beyond cursory glances at the level of human traffic, there are several other signs that you can look out for to gauge the performance of a mall being held by a Retail REIT.
And one of these indicators is the presence of anchor tenants. A sign that a Retail REIT is doing and will continue to do well is the presence of a good number of reputable anchor tenants within the property.
Anchor tenants are usually outfits such as supermarkets, department stores and cinema operators that generate the bulk of the human traffic that flows into the property.
The presence of well established anchor tenants may give the Retail REIT investor a peace of mind, knowing that the mall and many of its smaller tenants are going to enjoy a healthy amount of human traffic for as long as they are there.
Another indicator to look out for in a mall that is doing well is the lease terms being offered to tenants.
Retail REITs that command strong visitor walk ins are able to negotiate Triple Net Leases with their tenants. If tenants are still flocking to the mall despite being offered relatively unfavourable terms like these, it is almost a sure sign that the mall is going to continue to generate strong Property Yield numbers for many years to come.
Advantages of Retail REITs
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Retail REITs are highly regarded investments and almost certainly will feature as a staple in the typical investors' portfolio of REITs. This is due to the fact that Retail REITs enjoy several relative advantages over other forms of REITs:
Firstly Retail REITs enjoy a high barrier of entry. This is especially so in economies such as Singapore and Hong Kong where the supply of land is limited and the release of land for retail is purposes is highly regulated by the government.
Furthermore, the cost of building a mall is prohibitively expensive and banks are usually willing to fund the construction of a mall or shopping centre project only if the developer has a trusted track record of running one.
For this reason, Retail REITs are unlikely to face oversupply or any serious competition from new market entrants.
Another advantage of Retail REITs is that the malls and shopping centres that they hold today have largely been accepted as an essential consumer service.
Despite all the hype about on-line shopping, much of our weekly essentials – fresh groceries, haircuts, dining out, shopping and entertainment – are here to stay.
We still need brick and mortar structures like the malls to deliver these services. And despite how badly the economy is doing, spending on these weekly essentials are unlikely to deteriorate as badly as office or hotel occupancy levels.
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This is why during the recession period between 2008-2010, Retail REITs continue to enjoy robust property yield and are likely to continue doing so in the next downturn when it does happen.
But most importantly, Retail REITs often have more favourable lease agreements with their tenants as compared to other forms of REITs such as triple net leases, rent bumps and agreement to retain portions of profits from the tenants when sales reach target levels.
When malls enter into favourable lease agreements like these with their tenants, the owner of the property has effectively absolved himself of the major expenditures of running the mall while ensuring sustained income growth.
Costs of insurance, building repairs and property taxes are all passed onto the tenants, allowing the controlling Retail REIT to retain as much of the property yield as possible for distribution to shareholders. Lease agreements like these are rarely the case for other REITs such as Office REITs or Industrial REITs.
Disadvantages of Retail REITs
However investments in Retail REITs are not without a flip side. Investors looking to park their investment funds in Retail REITs need to be aware of the following factors before diving in and decide if the upside of owning Retail REITs are enough to mitigate the following considerations:
Retail REITs do not enjoy the luxury of long term leases with their tenants. Unlike Office REITs or Hospitality REITs that enjoy leases that last as long as 20 years, Retail REITs depend on short term leases from retailers, some of which are as short as only a few months long.
There is no telling how fast many of these smaller retailers can go out of business and the time taken to find a new tenant will contribute to the overall vacancy rate of the mall and this could show up in the overall property yield numbers.
Retail REITs are also known to allocate a large amount of capital for CAPEX as compared to REITs of other classes. Mall owners have to continuously undertake property refurbishments and upgrades in order to attract and grow shopper numbers.
To mitigate the effects of these expenditures, malls can pass on the cost of these refurbishments to tenants via their lease agreements as mentioned earlier.
Some Retail REITs are heavily reliant on a single anchor tenant or a handful of anchor tenants to sustain shopper numbers.
Should these anchor tenants relocate elsewhere, shopper arrivals into the property could be severely affected for smaller tenants and the REIT may face the pressure of having to revise rental rates downwards, affecting the distribution yield that you will collect as a shareholder.
Watch out for REITs that are doing well only because of a single anchor tenant such as a hypermarket or cinema. Can the REIT continue to sustain high rentals should these anchor tenants disappear?
(By Ridzwan Rahmat)