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3 Reasons For Investors To Like CapitaLand Retail China Trust

Many investors like to invest in real estate investment trusts (REITs) as these investment vehicles produce regular income, often on a quarterly basis. REITs also allow investors to invest in overseas properties easily without having to go through the hassle of owning a physical property in another jurisdiction.

There are a number of REITs listed in Singapore that have exposure to overseas assets and one of them is CapitaLand Retail China Trust (SGX:AU8U).

The REIT is the first in Singapore’s stock market that focuses on shopping malls in China. It has a portfolio of 11 retail malls that are located in eight of China’s cities. Some of the properties in its portfolio include CapitaMall Xizhimen, CapitaMall Wangjing, and CapitaMall Grand Canyon.

Here are three reasons to like CapitaLand Retail China Trust.

Resilient portfolio

One of the things I like about this REIT is the resiliency of its portfolio. Being a retail REIT is not easy in this day-and-age due to competition from e-commerce. Despite the rampant proliferation of online retail in China, CapitaLand Retail China Trust has managed to maintain a commendable portfolio occupancy rate of 94.9%, as of 31 March 2018.

Another telling sign is that in 2017, shopper traffic to the REIT’s malls increased by 4.7%, while tenants’ sales inched up by 0.8%. In fact, CapitaLand Retail China Trust’s tenants’ sales have been improving steadily since 2007, as seen from the chart below:Source: CapitaLand Retail China Trust presentation

The REIT also achieved a rental reversion rate of 5.6% in 2017. For the first quarter of 2018, the REIT’s rental reversion rate did even better, increasing by 12.8%. All these are testament to CapitaLand Retail China Trust’s resilient portfolio.

Strong financial health

As of 31 March 2018, the REIT had a gearing ratio of 32.5%, which is way below the regulatory limit of 45%. This means that the REIT has a relatively low level of financial burden, and has room to increase its borrowings if needed for future acquisitions. CapitaLand Retail China Trust’s gearing ratio is also below the average ratio of 34.8% among the REITs and stapled trusts listed in Singapore.

On top of its low gearing ratio, CapitaLand Retail China Trust has a high interest coverage ratio of 6.3. The interest coverage ratio measures how easily a REIT can pay the interest expenses on its outstanding loans. I generally like to see an interest coverage ratio of more than 4 for REITs.

Past and future growth

From 2007 to 2017, CapitaLand Retail China Trust has managed to grow both its net property income (NPI) and distribution per unit (DPU) steadily. During the period, its NPI had increased from S$46.5 million to S$149.2 million, while its DPU had climbed from 6.72 cents to 10.10 cents. These translate to annualised growth rates of 12.4% and 4.2%, respectively.

I believe CapitaLand Retail China Trust can go on to deliver stellar returns in the years ahead due to: (1) The rising disposable income of the middle-class population in China; (2) the rights of first refusal to purchase assets held by its sponsor, CapitaLand Limited (SGX: C31); and (3) the addition of Rock Square to the REIT’s portfolio since January 2018, which should drive its future performance.

One bonus reason!

And as a bonus reason to like the REIT, it actually has an attractive valuation. At the current price, the REIT has a price-to-book ratio of less than 1, and has a high distribution yield of above 6%.

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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 Retail China Trust. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.