3 Concerning Trends Affecting CapitaLand Mall Trust

CapitaLand Mall Trust (SGX:C38U) is the largest retail real estate investment trust (REIT) in Singapore. It currently has an impressive portfolio of 16 shopping malls located around our Garden City. Some of the malls in its portfolio include prominent destinations such as IMM, Plaza Singapura, and Clark Quay.

The REIT released its 2017 full year results a few months ago. Although the headline numbers of distributable income and distribution per unit both grew during the year, there are some worrying trends that investors should keep an eye on.

Declining shopper traffic

The retail market in Singapore is being disrupted by e-commerce, as online retail has reduced the need for shoppers to shop at physical malls. This is illustrated by a 0.3% decline in shopper traffic in 2017 in CapitaLand Mall Trust’s malls.

The slip in shopper traffic comes despite the fact that some analysts believe the retail industry in Singapore is protected from online disruptions due to Singaporeans’ need for social experiences. The data, however, begs to differ and shows that at least some of the retail businesses in Singapore have been affected by e-commerce and the proliferation of food delivery services.

Stagnating tenant sales

The decline in shopper traffic has likely caused CapitaLand Mall Trust’s tenant sales to stagnate in 2017. This is despite the growth of 3.1% of Singapore’s economy.

Source: CapitaLand Mall Trust 2017 fourth quarter presentation

As you can see from the graph above, around half of all the retail sectors in CapitaLand Mall Trust’s malls experienced lower sales in 2017. Worryingly, the F&B (food and beverage) and supermarket sectors, which make up some of the anchor tenants at the REIT’s shopping malls, experienced significant declines in sales of 1.9% and 7.2%, respectively. Low tenant sales will, in turn, translate to lower rental income as CapitaLand Mall Trust employs a gross turnover component in its leases.

Negative rental reversions

With declining shopper traffic and tenant sales, it is unsurprising that CapitaLand Mall Trust ended up with an negative rental reversion rate of 1.7% for 2017. Seven of the REIT’s 15 operational properties ended up with negative rental reversions, with West Gate and Bedok Mall faring the worse with their reversion rates of -10.2% and -6.2%.

CapitaLand Mall Trust’s Manager has said that the negative rental reversions are due to the strategic repositioning of the malls’ tenant mix. However, it’s also possible that the competitive landscape also had an impact on the pricing pressure felt by the REIT.

Worryingly for the REIT’s unitholders, CapitaLand Mall Trust will only feel the full effect of the negative rental reversions in 2018.

The Foolish bottom line

The physical retail industry in Singapore is currently facing challenges as e-commerce gains traction and delivery models take precedence. Investors should keep a close watch on these trends to see if CapitaLand Mall Trust has the ability to turn its fortunes around.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended units of CapitaLand Mall Trust. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.