Could CICT be the key beneficiary of higher downtown traffic?

TL;DR

• With a greater proportion of the workforce returning back to office, downtown malls could see an improvement in shopper traffic and tenant sales.
• CICT’s downtown malls such as Plaza Singapura and Funan could benefit as the average tenant sales in the past year are still significantly below pre-Covid levels.
• In addition, its office assets such as Asia Square Tower 2 could benefit from improving rents for Grade A office space in the Central Business District.
• CICT has a low gearing of 37.2%, and offers a dividend yield of 4.9%

What happened?

If you were back in office in the past week, It would be hard not to notice the rush hour crowds once again.

This comes after the recent relaxation of safe management measures as Singapore reached a new milestone in its Covid-19 journey.

From 29th March, 75% of employees are allowed to be back in the office.

One of the areas that we have seen this increased activity translating into benefits for the REITs is the fastest pace of increase in office rents in the past year.

The other area that could benefit is an improvement in shopper traffic and retail sales for downtown malls.

After all, as we start going back into the office, we are no longer doing our lunchtime shopping at suburban malls like Bedok Point and JEM.

Instead, malls like Raffles City and Plaza Singapura are where the crowds are on weekdays now.

And who owns Raffles City and Plaza Singapore? It’s none other than Capitaland Integrated Commercial Trust (CICT)!

Capitaland Intergrated Commercial Trust is a beneficiary of Singapore’s re-opening

CICT is the largest REIT listed in Singapore, and owns retail and office assets located mainly in Singapore.

Office assets make up 37% of its portfolio value, followed closely by retail at 33%. Integrated development would make up the remaining 30%.

Some of the assets it owns include Bugis Junction, Funan, Raffles City Tower and Asia Square Tower 2.

Because of its exposure to both the improving retail and office markets in Singapore, CICT is seen by many as a beneficiary of Singapore’s re-opening.

Source: Capitaland

Its downtown retail malls have significant room to recover

Interesting fact: Shopper traffic at CICT’s retail malls in the last year was only 61% of what it was in 2019!

While this was higher in its suburban malls at 65%, it was much lower in its downtown malls at 56%.

After all, we still have to keep our safe distance from others in the malls, and large groups of above 5 were not allowed to gather until recently.

More encouragingly, tenant sales in its suburban malls are now back to 96% of the pre-Covid levels!

Its downtown malls are once again faring worse on this measure, with tenant sales in the past year only at 77% of the pre-Covid levels in 2019.

What this also means is that there is still much room for CICT to see an improvement in its shopper traffic and tenant sales, especially in its downtown malls.

Another interesting statistic: the occupancy rate of its Tampines Mall was 100% as at 31 December 2021.

On the other hand, the occupancy rate of Clarke Quay was at 73.5%, as certain leases were impacted by government stipulated restrictions on trading hours at nightlife venues like clubs and bars without food licenses.

With the easing of restrictions relating to nightlife venues, this could only mean more good news for CICT.

Office portfolio benefitting from industry tailwinds

Like the other office REITs, CICT is also benefiting from the improving outlook for the Singapore office sector.

Another interesting fact: the return of office population into its Singapore office assets was just 36.9% for the week ending 21 January 2022, even as 50% of employees could return to office from 1 January 2022.

This number is set to rise further with the further easing of measures from March, where 75% of employees can return to office.

The improving office rental market could also help CICT to achieve better rents for its upcoming leases.

For example, the average market rent at Marina Bay was at $11.53 per square feet (psf) per month in 4Q21. This was higher than the average expired rents for Asia Square Tower 2 of $11.22. CICT was thus able to sign leases at a range of $10.47-12.50 psf, close to the expired rents.

On an aggregate basis, the average rent of leases expiring this year is S$9.03 psf, but the average market rent for Grade A office is at $10.46 psf.

This is a good thing as CICT would be able to earn a higher rental income as the leases are signed, and potentially pay out a higher dividend to unitholders!

What would Beansprout do?

CICT scores well on our metrics in evaluating REITs, as discussed in our previous article “Why Singapore REITs might be worth a look”

• Fundamentals: It is seeing improving outlook across both its Singapore office and retail portfolio. This could be boosted by more people returning to offices, which will benefit its downtown malls.
• Gearing ratio: Its debt levels are low with a gearing (debt/asset) ratio of 37.2%. This is lower than other REITs like Suntec REIT (43.7%) and Keppel REIT (38.4%).
• Dividend yield: The only drawback is that CICT’s dividend yield of 4.9% is lower than other commercial REITs such as MCT (5.4%) and Suntec REIT (5.1%). But for income seekers, a 4.9% yield is still not too bad after all!

Interested to find out more about other REITs that own retail assets in Singapore? Check out our article on “These are the best shopping malls in Singapore. Here’s how to own them“