Would I Buy This Singapore Retail REIT Today?

Let’ see whether this Singapore REIT can continue to make steady gains.

Today, I’m looking at a Singapore retail REIT.

And this Singapore REIT happens to own a popular, high-end shopping mall in the Orchard Road belt.

In fact, this shopping mall is a mix of retail and healthcare tenants.

It has over 60 medical specialist clinics in their 14-storey office building.

Enter Paragon.

Paragon has a strong suite of high-end luxury tenants — Burberry, Prada, Ermenegildo Zegna and Ferragamo are some of them.

Paragon is the crown jewel of SPH REIT (SGX:SK6U). 

Paragon contributes 56% of its total rent to SPH REIT.

Today, SPH REIT is a major Singapore retail landlord with a market capitalization of S$2.6 billion.

Even though Paragon was hit hard by the COVID pandemic last year, tenant sales quickly recovered as community cases in Singapore fell.

During its last three months financial results, Paragon collected a total rent of S$121 million, 16% higher as compared to last year.

This was despite Paragon being one of the worst hit shopping malls in the Orchard Road belt.

Paragon contributes the bulk of SPH REIT’s DPU.

DPU is distribution per unit, which measures how much dividends an investor would get for holding on to a unit of SPH REIT shares.

Since IPO in 2013, SPH REIT grew its DPU steadily year after year.

From 5.43 cents per unit in 2014 to 5.6 cents per unit in 2019.

But what’s not so clear for me is this.

I find Paragon’s retail tenant mix not the most adaptable in a fast changing e-commerce disruption environment. And the COVID pandemic.

And what’s more is Paragon’s tenants don’t differentiate from other high-end luxury malls like Ion Orchard And Ngee Ann City.

COVID made Paragon’s business so bad that one of its key tenants, Metro is now trying to pull out of the shopping mall.

That’s why COVID has forced Paragon’s occupancy rate down to 97%.

And that’s also why its DPU halved last year.

Even if Paragon can fill up its retail spaces, rental income might not be as high as pre-COVID levels.

Is this Singapore REIT’s sponsor “legit”?

That’s also why SPH REIT tries to diversify as much of its rental sources away from Paragon.

And that’s also another concern.

You see, SPH REIT’s sponsor is Singapore Press Holdings, SPH.

And SPH is a traditional media company that never had a strong property background.

And even though SPH REIT aims to be a retail landlord in Singapore, I’m not so confident about SPH REIT’s competitive advantage.

Let me explain.

To thrive as a Singapore REIT, you need to have a core strategy.

For example, Frasers Centrepoint Trust dominates Singapore’s suburban retail malls.

While CapitaLand Integrated Commercial Trust owns many of the high-quality, well-located Singapore retail malls.

Even this smaller retail Singapore REIT has its own competitive advantage.

For SPH REIT? I’m not sure. 

It’s a mix of different retail malls put together — Seletar Mall, Clementi Mall and The Rail Mall.

Simply put, I can’t find any core strategy behind SPH REIT.

And what’s more crucial is this. 

Land space to build more retail malls in Singapore is limited.

You simply cannot build anymore new malls in Singapore.

So, the only way SPH REIT can grow is to buy retail malls in Singapore.

SPH REIT has a low debt ratio and can continue to grow.

But the question here is: can they compete with other retail REIT giants to buy the best retail malls in Singapore.

Even if SPH REIT goes overseas, can they buy good malls?

In my opinion, it’s hard for a smaller Singapore REIT to compete this way without a strong property sponsor.

Look, the thing is, I like Paragon.

And I’m sure Paragon can continue to give a steady stream of dividends in the future.

But what I’m concerned is whether SPH REIT can buy good retail assets in the future.

Because that’s going to determine if SPH REIT’s DPU can grow.

So is SPH REIT a good Singapore REIT to buy now? 

For dividend growth, I’m not sure.

But if you’re looking at a steady dividend pay out I think Paragon is still a heavyweight for SPH REIT.

Other than that, I wouldn’t bet my money on SPH REIT yet.

Sometimes, investing can be simple. 

Always here for you, 

Willie Keng, CFA

Founder, Dividend Titan

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