Orchard Road supply squeeze. Between 2013 and 2016, only three malls along Orchard Road (representing ~12% of available stock) are expected to be completed – and all in 2013. They include the asset enhancement works to The Heeren (156k sq ft), Orchard Gateway (180k sq ft) and the redevelopment of 268 Orchard Road (147.5k sq ft). The Heeren will be almost fully occupied by Robinsons (which will move out of Centrepoint) and Orchard Gateway is already more than half pre-committed with tenants such as Crate & Barrel, Religion, Swatch Megastore, Nike’s new concept stall called Amplify Women’s and library@Orchard. According to property agent CBRE, Prime Orchard Road rents were unchanged QoQ and YoY at SGD31.60 psf pm in 3Q12, while the capital value for strata-titled retail space rose 3.8% YoY to SGD6,500 psf, albeit unchanged QoQ. Occupancy rate remained robust at 93.7%.

Retail demand to remain steady. Indicators are still showing a general positive tone in the retail market despite the gloom over the world economy. As of Sep 2012, the RSI, excluding motor vehicles, and the F&B sales index are up 0.7% and 2.2% YoY, respectively. Prominent store openings in 3Q12 included Mulberry (first Asian flagship store at Mandarin Gallery), Carven and Crate & Barrel (Ion Orchard), Vivienne Tam (flagship store at Scotts Square), Paris Baguette in Wisma Atria, Malaysian celebrity Chef Wan’s 1-Market and Japanese restaurant Tsukada Nojo in Plaza Singapura. We expect retail demand to remain steady on healthy tourist arrivals and domestic spending, as well as new retailers and international concepts.

Our estimates. We forecast tourist arrivals to grow at a CAGR of 5.2% over 2011-2015, reaching 16.2m arrivals by 2015 (14.2m in FY12). In our view, higher tourist arrivals will provide some form of price support for Orchard rentals, especially since there is no more known supply after 2013. We believe that Orchard retail demand will grow at a CAGR of 2.7%, outstripping overall supply increases (CAGR: 2.3%) for 2011-2015. This will cause vacancy rates to dip from 5.4% in 2011 to 4.2% in 2015. We also expect Orchard rentals to register growth of 0-2.5% pa in 2012-2015, as previous concerns over a supply overhang are removed. Thus, NPI yields are likely to remain steady at 5.0-5.2%.

Investment thesis intact. SGREIT’s key assets are in the coveted Orchard Road area, where tight supply and the entry of new international retailers should give it greater bargaining power in terms of leasing its space. We continue to like SGREIT for the rental upside at Wisma Atria (3Q12 passing rent at SGD35.04 psf pm) and income stability in Malaysia and Australia. At 6.1% FY13F yield and 464bps yield spread, we reiterate BUY with a DDM-derived TP of SGD0.85.

Source: Maybank Kim Eng Research - 11 Dec 2012