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THE almost impenetrable crowds of shoppers at Causeway Point might be intimidating and frustrating for visitors to the mall, but it has been a cause for celebration for investors in Frasers Centrepoint Trust (FCT). And, it tells an interesting story about how the real estate investment trust (REIT) is benefiting from the growth of an up-and-coming urban centre under Singapore’s decentralisation strategy.
Causeway Point is the largest asset in FCT’s S$2 billion (RM5.07 billion) portfolio of five suburban shopping malls. Located in the northern suburbs of Singapore next to the Woodlands MRT station, it now accounts for nearly half of the REIT’s total turnover. For 2013 financial year ended September (FY13), revenue from Causeway Point was up 13% to S$75.13 million. This came after a refurbishment completed last year that opened up more retail space and brought in big names such as Uniqlo. Rates for renewed leases signed during the year were 7.6% higher than the year before.
FCT’s second best performer for the year was also another northern suburban mall. Northpoint, a 21-year-old mall sited next to the Yishun MRT station, recorded revenue of S$48.81 million, or nearly 5% more than the year before. This was due to better rental rates for new and renewed leases signed during the year.
The Northpoint and Causeway Point malls, which span 235,653 sq ft and 416,137 sq ft in net lettable area (NLA) respectively, together account for some 80% of the portfolio’s total turnover and drove the 7% year-on-year (y-o-y) growth in net property income of S$111.59 million for FY13. As a result, FCT is distributing a record 10.93 Singapore cents per unit for the year.
Once a relatively isolated area famous for little other than being the gateway to Malaysia, the northern region of Singapore initially drew people with relatively cheap public housing and light industries. Today, Woodlands is a bustling suburban town centre served by MRT lines and home to major educational institutions, including the Singapore American School and Republic Polytechnic.
Now, the Urban Redevelopment Authority has laid out plans for more developments in the area. These include a business and mixed-use cluster closer to the waterfront, supported by two new Thomson Line stations as well as a cross-border rail link to Johor Baru. And, as the residential and commercial sectors expand, traffic and spending at FCT’s two northern shopping malls might continue growing steadily.
Advancing from the north
FCT has its sights set on more than the northern region of Singapore. The trust is also set to acquire Changi City Point, a two-year-old development in the heart of Changi Business Park, close to where Singapore’s fourth university, Singapore University of Technology and Design, is being developed. The deal, which is expected to be valued at around S$400 million, is scheduled to be done in FY14, depending on the completion of the separate strata-titling of the business park component. As analysts note, FCT has a debt headroom of around S$240 million, and is expected to raise both debt and equity to fund the purchase.
Also in the potential pipeline are Compass Point and the upcoming Waterway Point in Sengkang and Punggol respectively. Waterway Point is the retail centre of Watertown, and is jointly developed by Frasers Centrepoint, Far East Organisation and Japanese builder Sekisui House. The area is part of the northeast region of Singapore, which is also currently undergoing extensive urban development.
FCT has been rather less successful in the west, which has been making the headlines recently. In late 2009, FCT’s parent and sponsor, Frasers Centrepoint, which is part of the Fraser & Neave (F&N) group, had attempted to purchase the mall building in Clementi Town Centre, which was being built by the Housing Development Board as part of a housing development. Frasers Centrepoint put in a bid of S$352.1 million, or more than S$2,000 per sq ft, but came in third. The tender went to Singapore Press Holdings and NTUC Income and NTUC Fairprice, who jointly bid a whopping S$541.9 million. The mall was then sold to the SPH REIT, which was listed in July, for S$570.5 million.
By Christmas this year, a new seven-storey shopping mall next to the Jurong East MRT station will be open for business. Westgate is jointly developed by CapitaMalls Asia, CapitaMall Trust and CapitaLand. CapitaLand also owns the nearby JCube and IMM malls, while JEM, a mall next to Westgate that opened in June, was developed by Lend Lease.
Tenant-mix review
In fact, apart from Causeway Point and Northpoint, FCT’s other existing assets haven’t been performing that well. FCT owns Anchorpoint on Alexandra Road, which is directly across the road from the IKEA superstore. It also owns Bedok Point, a short stroll away from the Bedok MRT station. But these two malls, while admittedly much smaller than the others, have been a drag on FCT’s performance.
For FY13, rates for renewed leases at Bedok Point were 14.5% lower than the year before, which FCT’s managers attributed to stiffer competition. In fact, a new CapitaMalls Asia shopping centre, Bedok Mall, is scheduled to open by Christmas just metres away, as part of CapitaLand’s Bedok Residences condominium.
Indeed, some retail tenants at Bedok Point have already started defecting to the new development. Chew Tuan Chiong, CEO of FCT’s manager, acknowledges the challenge, and says that in the short term FCT would be cutting its fixed rents to compete with Bedok Mall’s expected rates. FCT’s aim is to try and keep the retailers it wants, but will at the same time take a higher percentage from the tenants’ sales. About 48 leases, representing 56% of NLA, are up for renewal in FY14. But most important is the upcoming review of Bedok Point’s tenant mix, Chew says. “Although it’s a small mall, we’ve looked at it closely and have decided that we need to reposition it slightly differently.”
The mall, opened in December 2010, started out with a large food component, with more than 40% of its space taken up by food and beverage retailers. Chew says this is unlikely to change, given that restaurants and cafés draw people in. However, what’s different would be an anchor tenant that is expected to take up as much as two-thirds of the basement space. He reveals that FCT has already secured a major home appliances and electronics retailer, which he expects to be “a magnet for [shopper] traffic to come in” and a boon for the other retailers in the mall as well.
Still, that change will take another couple of years to kick in. “But in the meantime, we will be fine-tuning the tenant mix, with the view that we want to make the mall more sustainable,” he says. “So, instead of trying to squeeze rent, we’ll go for finding the right tenancies.”
Future expansion
Besides the upcoming acquisition of Changi City Point, FCT is also expected to eventually purchase The Centrepoint on Orchard Road from its parent. “Centrepoint itself has been adjusting to its micromarket for the last few years. It’s also part of the strategic planning of the group, whether it can be a mega development together with Starhub [Centre, acquired by Frasers Centrepoint in 2010],” Chew says. “I think eventually Centrepoint will be ready for injection into the REIT. That is a non-surburban mall, but by that time I guess the REIT would have grown to such a size that the overall character would not be changed too much.”
Chew says FCT also has its eye on developments in Malaysia. Frasers Centrepoint is in a joint venture with Bursa Malaysia-listed Fraser & Neave Holdings Bhd to build a mega mixed-use development in Petaling Jaya’s Section 13, where F&N’s factories once stood. “We have the right of first refusal to the mall.” But, in spite of the recent change in ownership of the F&N group, “we are not looking at Thai retail assets at the moment”, Chew says, although he adds that the Thai ownership of the group could mean new retailers or F&B players for Frasers Centrepoint malls here.
At any rate, occupancy rates across FCT’s existing malls are high, at more than 98% on average, and analysts note the healthy rental reversions reported for FY13. A big chunk of leases — about 30% of NLA in the overall portfolio — is up for renewal in FY14, and Chew is confident of securing higher rates.
Analysts say positive rental reversions can be expected from Causeway Point and Northpoint, given the strong traffic and tenant sales. “However, we expect more moderate reversion rates compared with previous years as a significant amount of upside from the asset enhancement works have already been captured,” say analysts at DBS Group. Earnings growth is expected to be driven by the acquisition of Changi City Point instead. DBS is keeping its “buy” call on the stock, with a price target of S$2.14.
Meanwhile, analysts at Citigroup note that FCT’s smaller malls are starting to be a drag on the group’s performance. The properties saw occupancy levels in FY13 fall as much as 3.6 percentage points, which “echoed management’s guidance that smaller malls would see higher operational vulnerability in the current environment”.
The analysts also write in the Oct 22 note that there is still the risk of a sharp hike in interest rates that would lead to higher financing costs, which would impact REITs in particular. Certainly, FCT has taken a beating in the last six months, with its units losing 25% of their market value since April. At current levels, FCT is trading at just above its net asset value of S$1.77, and offers a forward yield of about 6%.
Citigroup is keeping its “neutral” call on the stock, with a price target of $1.90. — The Edge Singapore
This article first appeared in The Edge Financial Daily, on October 29, 2013.
