Sasseur Real Estate Investment Trust (SGX: CRPU) and CapitaLand Retail China Trust (SGX: AU8U) are two China-focused retail real estate investment trusts (REITs) listed in Singapore. Both offer investors exposure to the fast-growing retail industry in the Middle Kingdom and at current prices, sport yields of more than 6%. But which of the two REITs is a better buy? Here’s a comparison to find that out.
Background of the REITs
While both these REITs invest primarily in retail malls in China, the two still sport important differences.
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Sasseur REIT has four outlet shopping malls in its portfolio. Outlet malls offer shoppers the chance to buy branded products at large discounts. Unlike traditional retail malls, outlet malls are also usually located in suburban districts. As with most outlet mall landlords, a portion of Sasseur REIT’s rental income is tied directly to its tenant sales. This agreement means that Sasseur REIT’s rental income is more volatile but the REIT can also gain should tenant sales increase.
On the other hand, CapitaLand Retail China Trust owns shopping malls around China. Its portfolio consists of nine multi-tenanted malls and three master-leased malls. Tenant contracts in traditional shopping malls are usually longer and more stable, but may not have as much exposure to growth.
Internal growth prospects
We will start the comparison with growth prospects. There are two main types of growth — internal and inorganic growth. Internal growth is the REIT’s ability to grow its rental income at its existing properties. Inorganic growth entails the use of capital — both debt and equity — to make acquisitions that can reward unitholders.
As mentioned earlier, Sasseur REIT’s rental income is tied directly to tenant sales. As such, it has the potential to grow as long as tenant sales increase. In the past year, tenant sales at each of its four malls have grown year-on-year. The US-China trade war has had little impact on its tenant sales as domestic demand for discounted branded retail goods have remained robust. In addition, the REIT signed on new shopper VIP members last year who typically account for almost 50% of the outlet malls total sales. The growing number of VIP members should bode well for Sasseur REIT’s tenant sales.
CapitaLand Retail China Trust had an excellent first quarter in 2019. Its rental reversion rate was positive at 9.5%. The high rental reversion rate would likely boost rental income and consequently distribution per unit growth. It is also consistently enhancing its tenant mix to keep its malls relevant and grow the shopper traffic.
While both malls have decent internal growth prospects, Sasseur REIT, in my opinion, has a faster internal growth opportunity as its rental sales are tied directly to tenant sales, which look likely to continue to grow over the next few years.
Financial muscle for acquisitions
Another way that a REIT can reward unitholders is by making use of its additional capital for yield-enhancing acquisitions.
The easiest way to determine the REIT that has greater financial power for acquisitions is to look at the debt-to-asset ratio. This ratio tells us how highly-leveraged a REIT is and whether it has the ability to take on more debt to fund acquisitions in the future.
Sasseur REIT has a debt-to-asset ratio of 29.2%, compared to CapitaLand Retail China Trust’s figure of 35.5%.
In this respect, Sasseur REIT has more financial power to make more debt-funded acquisitions.
The third aspect I will compare is the pair’s existing valuations. The table below shows their distribution yields and price-to-book ratios.
Source: Author’s compilation of data from SGX
Sasseur REIT has both a higher yield and a lower price-to-book ratio.
The Foolish Conclusion
From the above comparison, Sasseur REIT looks to be a better buy at the moment. Not only does it offer better growth prospects, at current prices, it also offers a better yield and higher discount to book value.
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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 Jeremy Chia owns units in Sasseur Real Estate Investment Trust. Motley Fool Singapore has a recommendation for CapitaLand Retail China Trust.