As a Real Estate Investment Trust (REIT) investor, I been hearing a lot of less desirable comments recently.
No doubt they have been linked more to that there are more vacancies in shopping malls around Orchard. Middleground did a piece on whether REITs will kill or save Singapore’s shopping malls.
The biggest hearsay is that REITs create an artificial environment where the fundamentals are non-existent. They are a bubble waiting to burst.
I find this way of thinking really absurd.
What does it mean by fundamentals to be non-existent?
When we describe fundamentals to be non-existent, it means that the prices of the financial assets are artificially propped up.
Whatever, that the managers, majority shareholders, and sponsors do to affect the REIT and its underlying properties will not result in positive and negative outcome.
It also means that the investment properties held by the REITs are not affected by the basic laws of property investments.
However, through the manipulation of the share market, cornering it, doing stock market operations, they are able to jack up or bring down the REIT at their whim.
Is this really the case?
The Bedok Point Case Study
One of the argument is that the REIT managers keep raising rents, so much so that the poor tenants or prospective retailers will have to take the higher rent.
This is how the rent is being jacked up.
I find one good case study to be that of Bedok Point.
In September 2011, Frasers Centerpoint Trust (5.9% Dividend Yield) acquired Bedok Point, which was an old cinema in Bedok converted into a shopping mall.
Bedok, for a long time, do not have any shopping malls (I don’t understand why since there are so much foot traffic.)
My friend lives in Simei, and Bedok Point have become one of his favorite haunts as a young yuppie.
The mall caters more to the suburban crowd with much eateries, which is a common theme similar to Causeway Point and Northpoint.
The mall was frequently packed.
In December 2013, Bedok Mall by Capitaland opened for business. Bedok Mall is located within an integrated bus interchange next to the Bedok MRT.
Suffice to say, the location is much better.
The first week, a visit at Bedok Point is truly gruesome. Vacancy went up.
Here are Bedok Point’s figures taken from FCT annual report over the years. Since the opening of Bedok Mall, Revenue growth and NPI growth have been adversely affected.
While occupancy is still good at above 90%, you can see the rental reversion is very different from FCT’s other malls as well as Capitaland Malls shopping malls.
The occupancy figure from the latest quarter (not shown here is actually worse than this)
If the investment properties under FCT is not governed by the basic demand and supply, or that better location is a factor, then Bedok Point should not be showing this set of data.
Regardless of location, demand and supply, they should achieve positive rental reversion isn’t it? They shouldn’t have to lower the asking rent isn’t it?
The retailers are suffocating from the merciless REIT landlords
There is also an argument that the REITs ended up earning money, whether the retailers make money or not.
The high rents are killing them, or making the risk of doing business to be extremely high.
The above sales and occupancy cost data comes from FCT’s annual report. It aggregates the sales data of their tenants and the rent they pay.
A high percentage indicates that the rent is unsustainable. It indicates to investors that we should be wary that rents will stagnate or be reduced.
The figures will probably show that rent is a smaller percentage then you realize. If we add another big component, which is manpower, there are still much margins to work with.
The table above shows the occupancy cost of some retailers who have their business residing in shopping malls. We do not see a trend that the REITs are raising the rents to an unsustainable levels for them. The rent/operating lease expense to revenue is largely consistent.
Paying attention to Soup Restaurant, we can see that their revenue is falling and so is the rental expenses. It doesn’t mean that the REITs are not charging them lower rents, it means that retailers will optimize when business is not doing that well.
The real argument here is between the retailers that have scale and those that are trying to create something.
The former have much scale to have centralized kitchens to optimize costs while the latter do not have that luxury. Most of all as a small entrepreneur effort, the retailer do not have the capital to bleed and turned the business around.
Their rent is higher than the Sakae Sushi and such because they cannot attract traffic themselves.
If REITs charge higher rents then non-REIT shopping malls, why don’t you as the retailer go to non-REIT shopping malls?
There is the argument that REITs get a bad reputation and cramp up entrepreneurship for impeding creativity.
I stated that I agree with that argument for the REITs but I do not think it is the factor that crap up entrepreneurship.
The REITs do not owned all the shopping malls.
Last I know, NEX in Serangoon is not owned by a REIT, Jurong Point is not owned by a REIT (if memory serves me well its owned by Lee Kim Tah). You have retail spaces in the spaces owned by SMRT.
You have integrated retail spaces such as the Paya Lebar Square.
These are all next to MRT stations and good locations.
They should be cheaper since they are not owned by REITs isn’t it?
Right now, we heard of the vacancies in Shaw House in Orchard. The rent should be cheaper which should be more affordable to a startup retailer.
If REIT’s mall is expensive, then these shopping malls should have more inquiries then the REIT’s mall. Is that the case?
As a start up, you will be flocking to Shaw House and Far East Shopping Center. You can test your concept there and if you are successful, you can then move on to a mall closer to the main MRT stations.
The reality is, you would not want to do that.
These places have a domino effect in that due to the vacancy and poor shop themes, are not going to attract traffic which is what you are looking for, whether you are a big or small retailer.
What you are paying for is the proximity, the location to stronger people traffic.
If REIT malls have no fundamentals, location should not matter.
If prices are the be all end all, you would take the rents of the malls at Shaw House, Bedok Point, Lucky Plaza in a heartbeat.
A Retailer Moves to Mandarin Gallery, then moves back to Paragon
My friend told me a tale of his wife’s hairdresser, who was based in Paragon Shopping Mall, deciding to move to Mandarin Gallery.
And then the hairdresser had to move back to Paragon Shopping Mall.
These malls are so close to each other and if fundamentals do not matter, that how the manager sets up the theme of the mall doesn’t matter, a hairdresser should not have to bite the bullet to shift back to a more expensive retail space.
Location does matter, shopper’s traffic does matter, and how the manager sets up the mall does matter.
The Hougang Mall Case Study
I stayed in Seng Kang for 18 years. Which is as long as Hougang Mall have been operating. I went there in the first week.
And I was so demoralized how drab or unappealing that mall looks.
I stopped visiting that mall for some time since it is a few bus stops away.
Then CMT bought it over. In 1 years time, they turned the mall around to bring in some quality eateries, which is what would be more demand for a suburban mall, and made use of the spaces better.
There were also more shops that cater to our daily needs, overall it became a more desirable shopping place.
To be fair, REITs tries to work their magic but not always succeeding. A similar case study can be drawn of another close by suburban mall, Rivervale Mall in Seng Kang.
If mall operators do not matter, and do not value add, then we should not see such differing results.
It is a matter of demand and supply
There is no difference whether the space is owned by a REIT or not a REIT.
Are you going to say that a non-REIT owner of a mall, an industrial space is altruistic and not profit driven?
If the malls keeps rental low, they are going to get a flood of prospective retailers.
They will have a joy time, selecting the retailers they want to work with to provide the best tenant mix.
If it is so cheap, for each space there are 5 prospective retailers how does the retailers get their hands on the space? They will be willing to pay more to rent.
Just as the example of Bedok Point, if rents are unaffordable, are the malls going to put a gun to the head of the retailers such that they have to signed a 3 year lease even if business is unsustainable?
The ones who couldn’t afford will move out, but the REITs gain positive revision of rents because some retailers think they can make it work.
Fundamentals still governed, and we recently have seen the industrial REITs, office REITs facing some oversupply and a tough time hanging on to their tenants.
They are not thinking so much about raising rent.
These are all fundamentals at work. When economy doesn’t do well, businesses fold, the malls and industrial spaces occupancy gets affect.
REITs or no REITs, if you owned an industrial space, you suffer.