Many real estate investors have turned to REITs to find diversification as well as reduced risk within a sector reported to be at somewhat of a standstill. Add to this the advantage of having a management team with deep industry experience on board and one is left with an enticing opportunity for attractive returns on investments.
With their success measured by occupancy rates, retail REITs’ tenants can be broadly categorised into two variants – anchor as well as inline tenants. Anchor tenants tend to be larger established companies who take up considerable space in shopping centres and sign longer leases for subsidised rates. Examples of these kinds of tenants are large grocery chains such as Cold Storage or departmental stores such as Isetan. Inline tenants, on the other hand are smaller, usually standalone merchants who sign shorter leases at higher rates.
The Singapore Landscape
Retail REITs represent the largest segment of REITs in Singapore (by market capitalisation). They have been the best-performing REIT segment in the 2017 YTD, with an average of 36.7% total returns. They have also successfully maintained the lowest average debt-to-asset ratios among the five REIT segments. When speaking of the returns on REITs, it is important to take into account that the figures also factor in the distribution per unit – how much dividend one gets for every unit/share of the REIT.
Retail REIT assets are typically very visible and consist of either suburban malls driven by necessity spending, such as food and non-durables, or downtown malls driven by durables, luxury, and tourism spending. Customers expect their shopping centre experience to provide entertainment with developers incorporating other amenities into their list of offerings in the shape of cinemas and game arcades as well as spa and wellness centres.
Advantages of Investing in Retail REITs
A staple of many investor portfolios, retail REITs offer credibility through high barriers to entry. This is especially so in land scarce Singapore and Hong Kong, where retail land is highly regulated by the government. They also encompass developments that are highly expensive to build, with banks only financing companies with a stellar track record, a further assurance of their success. Such countries therefore rarely see competition from new players or experience oversupply.
Lease agreements also tend to include favourable terms that may include profit sharing when certain revenue targets are met. Such agreements are rarely present in other REITs. Many shopping centres – as highlighted above – also encompass necessities such as groceries and hairstylists that are immune to economic conditions. These REITs have been known to somewhat withstand economic slumps, especially in countries where shopping and dining out are part of the fabric of everyday life.
Disadvantages of Investing in Retail REITs
Although often having the benefit of enjoying favourable terms on lease agreements, the flip side of these REITs is that they manage properties that have tenancy agreements that last as little as a few months, in stark comparison to the long-term leases (corporate and individual) that the hospitality sector signs up for. Running shopping centres also takes constant expenditure – for renovation, promotions, etc. When anchor tenants pull out, these centres may go through considerable revenue cuts until they are replaced.
It should be kept in mind that the attractive figures highlighted above are not a representation of the industry moving forward. The retail sphere is facing certain issues that may bring down these returns.
There we have it, a rundown of the considerations necessary to invest successfully in the retail REITs industry. As always, it is important to be fully aware of the governing terms of any investment before making a financial commitment. When it comes to retail REITs, investors should consider factors such as their dividend yield, track record of the developer, along with the geographical location of the development itself to ascertain its propensity for success.