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Tug-of-Fools: Frasers Centrepoint Trust – The Bear Argument

bear

My name is Chong Ser Jing, and this is my bear case for Frasers Centrepoint Trust (SGX: J69U).

When it comes to Singaporeans’ favourite past-times, it’s tough to look past eating and shopping. And when it comes to the latter, especially for those living in our island’s heartlands, it’d be tough to miss Frasers Centrepoint Trust in action. After all, the real estate investment trust is the owner of six suburban malls in Causeway Point, Northpoint, Changi City Point, Bedok Point, Yewtee Point, and Anchorpoint.

The REIT, which is managed and partly-owned by Frasers Centrepoint (SGX: TQ5), got its debut in Singapore’s share market back in July 2006. Starting from the day after it first traded in the share market, capital appreciation of the REIT’s units alone has delivered a return of some 85% at its current price of S$1.954 (as of 22 July 2014); that’s a market-beating performance with the Straits Times Index (SGX: ^STI) gaining just 35% to 3,317 points.

With a distribution per unit that has grown in each consecutive year since its listing (see table immediately below), Frasers Centrepoint Trust’s total returns – where gains from reinvested distributions are factored in – becomes even more impressive at 201%.

Financial year ended 30 September Distribution per unit (Singapore cents)
2006 4.35
2007 6.00
2008 7.29
2009 7.51
2010 8.20
2011 8.32
2012 10.1
2013 10.9

Source: S&P Capital IQ

Given its historical performance, it’s quite an understatement to say that Frasers Centrepoint Trust has served its investors well. But, that was then and this is now; there’s an important risk looming in the horizon that bears watching by investors.

Back in January this year, Howard Schultz, chief executive of the giant American coffee-chain Starbucks, commented that there’s a huge change happening in USA’s retail environment. His main argument: Online retailers are starting to hit traditional brick-and-mortar stores really hard and the tide may be irreversible. Schultz may or may not be exaggerating, but his words – though it’s targeted at the retail environment in the USA – is a reminder that changes to the retail landscape are happening elsewhere in the world.

In Singapore, such an effect doesn’t seem to be that prominent yet given that CapitaMall Trust (SGX: C38U) – an owner of 16 retail malls in Singapore located in both suburban areas and near the city centre – hasn’t seen any prolonged downward trend in its shopper traffic and tenants’ sales. However, Frasers Centrepoint Trust’s retail properties seem to be displaying a different sort of trend as seen below:

Source: Frasers Centrepoint Trust’s earnings releases

Beginning from the trust’s financial year ended 30 September 2013 (FY2013), shopper traffic has been on a rather steady downward trend. It’s a little alarming to see the year-on-year dip in shopper traffic for the October-December, January-March, and April-June period for FY2014 considering that Causeway Point had undergone major refurbishment works that was completed only in December 2012; the mall has the largest contribution to the REIT’s total net lettable area at 38%.

Frasers Centrepoint Trust has done a great job since its listing in terms of earning higher income from its properties (it has done so through means such as increasing its rental rates and carpark income). But, it’s also good to note that the health of the REIT’s assets would ultimately be tethered to the financial health of its tenants; if shoppers aren’t turning up at the malls, it’d be tough for the REIT’s tenants to do well.

Of course, there could be many different reasons for the fall in shopper traffic that’s happening in the REIT’s malls; for instance, shoppers’ preference might have begun to slowly switch to malls that are located away from the suburbs. In fact, the sea-change in retail that’s happening in the USA might just never happen in Singapore for the next decade or two (after all, CapitaMall Trust isn’t seeing the same trends as Frasers Centrepoint Trust currently).

Knowing the real reasons behind the change in Frasers Centrepoint Trust’s shopper traffic might give investors a better idea on the chances of management reversing the course. But as it stands, the REIT’s retail malls seem to be seeing a decrease in footfall – and that’s enough to give me pause.

You can read the bull case here.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Starbucks.