GST hikes are coming. Will Retail REITs get a boost?

What happened?

Recently, we came across an article which reported that Singaporeans are rushing to buy big ticket items before the goods and services tax (GST) rises to 8% on 1 Jan 2023. 

One couple purchased more than S$9,000 worth of electrical appliances for their uncompleted apartment, and saved about $100 in GST payments.

It was also reported that some diners have opted to settle their Chinese New Year restaurant meals in advance to avoid paying the higher tax.  

Consumers appear to be spending even with elevated inflation and the threat of an economic slowdown.

Will this benefit retail REITs?

Will retail REITs benefit from GST hike?

#1 – GST hike causes spending to be brought forward before declining later

This trend of purchasing in advance has been noticeable each time there has been a GST hike in Singapore in the past. 

In 2007, an increase in the GST to 7 per cent in July saw an 8 per cent spike in the retail sales in June compared to the month before.

The spike was particularly evident in big ticket purchases such as motor vehicles and watches, where the impact of the GST is more significant. 

After all, a 2 per cent tax on a $10,000 watch ($200) is going to matter a lot more than a $10 meal. 

However, we should not extrapolate this increase into the future, as sales will typically come down after the GST increase. 

Following the GST increase, overall retail sales fell by 14% in July 2007 compared to the month before. 

As for watches and jewellery, sales were down by a whopping 26% in July compared to the month before!

#2 – Retail sales has recovered strongly

Regardless of the impact from the GST hike, it’s important to know that consumer spending in Singapore has been very strong even without taking into consideration the upcoming GST hike.

Retail sales grew 10.4% in October compared to the previous year, marking the seventh consecutive month of double-digit growth. 

The increase in consumer spending was driven by food & alcohol (+61.0% year-on-year), wearing apparel and footwear (+52.9%), and department stores (+43.7%). 

Singapore’s re-opening has led to more people dining out, and the return of tourists has also led to greater spending. 

#3 – Recovery in retail sales has led to higher retail rents

The general recovery in consumer spending has already led to an improvement in rents earned by Retail REITs. 

According to property consultant CBRE, retail rents for suburban malls in Singapore grew by 1.0% in the third quarter of 2022 compared to the previous quarter.

Retail rents for shopping malls in Orchard were 0.7% higher compared to the previous quarter. 

This also marks the first time Orchard rents have turned positive after the Covid-19 pandemic led to consecutive quarters of decline. 

Retail REITs have reported similar improvements in their recent results. 

For example, Frasers Centrepoint Trust, noted a 4.6% increase in gross revenue for the year ending September 2022.  

What would Beansprout do? 

The upcoming GST hike could lead to some purchases being brought forward. 

However, past instances have shown that we should not expect this increase to continue, as consumer spending would typically fall after the short-term boost. 

More importantly, we have already seen a sustained recovery in retail sales with Singapore’s re-opening.

This improvement in retail sales has led to higher rental income for retail REITs. 

There are seven Singapore Reits which have significant exposure to Singapore-based retail assets: CapitaLand Integrated Commercial Trust, Frasers Centrepoint Trust, Lendlease Global Commercial Reit, Mapletree Pan Asia Commercial Trust, SPH Reit, Starhill Global Reit and Suntec Reit.

These REITs offer investors a dividend yield of 5.0% to 7.2%. 

For investors who are interested in Singapore REITs but prefer diversified exposure through ETF, we recently shared how to choose the best REIT ETF for your portfolio. 

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