Investors in the week ahead will receive an update on Singapore’s struggling retail sector, amid ongoing changes in the industry, as well as headwinds from global trade conflicts.

Economic growth in Singapore has been generally deteriorating, underscored by a weakening of the country’s manufacturing base, a sharp decline in consumption and an overall gloomy outlook among businesses.

In the second quarter of 2019, Singapore’s gross domestic product (GDP) rose only 0.1% year-on-year, the slowest pace in a decade, while its manufacturing sector seeped further into contraction territory.

The Monetary Authority of Singapore (MAS) said it expects GDP growth for 2019 to come in at 1.5-2.5% — down from 3.1% in the prior year – due in large part to trade-related concerns, especially in the area of electronics production, as well as the ongoing downswing in the global electronics cycle.

Shopping Break

Against this backdrop, retail consumption has been largely disappointing. In May 2019, retail sales fell 2.1% year-over-year and decreased 2.2% month-over-month.

According to The Department of Statistics, Singapore, the sharp fall from the prior year was primarily a result of lower sales of motor vehicles (-7.5%) and furniture & household equipment (-7.5%). Also, among the steeper falls, purchases of computer & telecommunications equipment decreased 7.0%, optical goods & books dropped 4.9%, and department stores declined by 4.7%.

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The total value of retail sales amounted to an estimated $3.7bn, of which online retail sales made up around 5.3%.

The MAS added that while “stable labor market conditions could stimulate higher consumption, structural changes including increased competition from overseas e-commerce players would cap increases to domestic retail sales.

“Nonetheless, consumer-facing industries, particularly F&B and retail services, are expected to benefit in the medium term from initiatives to lift productivity through innovation and enhancements of processes.”

Statistics Singapore also highlighted that firms in the retail trade industry expect to hire less in the third quarter 2019, with retailers of wearing apparels & footwear and motor vehicles among those that are “less optimistic in their business outlook during this period.”

The statistics agency added that firms in the wholesale trade and financial & insurance industries are similarly less optimistic in their business outlook for Q3 2019 compared to the preceding 6 months, given that wholesalers, as well as banks and finance companies, expect the ongoing trade conflict between the U.S. and China “to have a negative impact on their businesses.”

A Case for Retail-related REITs

Meanwhile, although some retailers in Singapore have been suffering from less sales, a handful of real estate investment trusts (REITs) engaged in the development, ownership, leasing, management and operation of Singaporean shopping malls have seen double-digit returns on the Singapore Exchange (SPX) year-to-date.

Frasers Centrepoint Trust (SPX: J69U), Capitaland Mall Trust (SPX: C38U) and SPH REIT (SPX: SK6U), for example, enjoyed 30.3%, 23.5% and 11.9% in total returns YTD, respectively, according to SPX.

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Moreover, these REITs have been outperforming the SPDR Straits Times Index ETF (SPX: ES3) by a healthy margin. The ETF has among its top holdings financial sector firms, including DBS Group Holdings (SGX: MU7), Oversea-Chinese Banking Corp (OTCMKTS: OVCHY) and United Overseas Bank (OTCMKTS: UOVEY), as well as telecoms company Singapore Telecommunications (Singtel – SGX:Z74).

One factor behind investors’ demand for these REITs could reside with their attractive dividend yields compared to Singapore’s ultra-low interest rate environment.

SGX lists the 12-month dividend yields for Frasers Centrepoint Trust, Capitaland Mall Trust and SPH REIT in the areas of 4.1-5.1%, while the yield on Singapore’s 10-year government note was just south of 1.9% intraday Thursday.

Other reasons behind the lofty valuations may center on conservative debt management.

In early April 2019, for instance, Capitaland Mall Trust – Singapore’s largest REIT by market capitalization, with a portfolio of 15 shopping malls, including a 40% interest in Raffles City Singapore, issued US$300m of 3.609% 10-year medium-term notes (MTNs) with proceeds from the sale mainly pegged for refinancing existing borrowings.

Moody’s Investors Service, which assigned an ‘A2’ investment-grade rating on the deal, pointed out that for the 12 months ended December 2018, Capitaland Mall Trust had adjusted debt/total deposited assets of around 34.8%, adjusted net debt/EBITDA of 6.9x and adjusted EBITDA interest coverage of around 5.5x.

Moody’s analysts Saranga Ranasinghe and Laura Acres said the ‘A2’ rating was underpinned by the REIT’s “large scale and market share,” as well as its diversified portfolio of “high-quality suburban and downtown core shopping malls that benefit from active portfolio management and enhancement.” They added the rating also recognized Capitaland Mall Trust’s “proactive capital management and its ability to access the debt and capital markets.”

Economic Calendar

Market participants in the week ahead will get fresh figures on Singapore’s foreign exchange reserves, as well as an update on retail sales for June.

Wednesday, Aug 7

• Foreign Reserves (July)

Thursday, Aug 8

• Retail Sales (June)