1. Is Asian retail suffering as it is in Australia?
To an extent, yes. Non-essential retail tenants have shuttered stores and tenants are asking for rent relief. It’s a tough environment for retail at the moment everywhere. But cyclical and structural changes in the retail sector were underway way before this pandemic. This started the trend to higher vacancies in tertiary retail locations. That said, there is stronger demand for space in retail destinations with high connectivity and footfall, which is especially important in the densely population cities of Singapore, Hong Kong and Tokyo where the Asian REIT Fund is invested.
For investors in the APN Asian REIT Fund and retailers themselves, store rationalisation may be no bad thing. Already dominant malls populate the Fund’s portfolio because they have traditionally achieved higher levels of productivity. Rationalisation should only increase their standing.
Whilst trading conditions are difficult, I can say with a high degree of confidence that when the pandemic passes, going to malls will absolutely remain an integral part of life in cities like Singapore and Hong Kong. We’ve also been hearing of ‘revenge spending’ in China when the lockdown restrictions were lifted earlier this month. If consumers are indeed making up for lost time, it will be the dominant malls that garner the lion’s share of the trade.
So yes, Asian retail is suffering, but not quite as much as in Australia, and we expect the rebound to be quicker and potentially stronger.
2. Is there going to be a reduction in retail rents in Asia?
The dominant malls referred to above are high-quality, high productivity centres with 100% occupancy rates and waiting lists for potential tenants. But we are in unique circumstances. If overall retail sales are weak for a while, to some extent occupancy costs will increase in a relative sense. Some retailers will be able to absorb that better than others, and some may seek rent reductions.
At this point, it’s hard to say. No one knows the impact of the various government stimulus packages, which essentially hand out cash to every citizen. This is already occurring In Singapore and Hong Kong with Japan recently announcing universal cash handouts of ¥100,000 per individual. That is a direct lift to consumer spending, which will help the retail situation in the three key Asian regions in which we invest.
It’s also important to note that restaurants and food and beverage are a big component of the Asian malls in which we invest. In Singapore and Hong Kong they’re an essential part of the social fabric, places where people go with their family and friends. This is where family dinners are held, not in their own homes. The demand for this space will come back to where it was pre-COVID. Rent reductions are a possibility but not a certainty, and over the long term we’re confident they will return to pre-COVID levels.
3. Are you looking at cutting distributions?
The Fund was set up to deliver to our investors a stable monthly income. Rest assured that we’re doing our very best to maintain this at the same level.
The REITs in Singapore have been given some leeway by the authorities to manage their cashflow through this period, which in my view gives them some equity value protection. But it also means some REITs may delay paying distributions if their tenants are unable to temporarily meet their rental obligations.
We believe that the majority of REITs will not take advantage of this new ruling and ‘hoard cash’. Retail and hotel REITs (the later don’t feature in the Asian REIT Fund) may temporarily suffer some disruption in trade and hence may need to reduce their distributions in the short term but, from our conversations with landlords and tenants, we understand REITs are working with their tenants on a case-by-case basis to get the best possible result for both parties.
Landlords are focused on maintaining good relationships with tenants they believe will be around post-COVID and helping those in need by giving temporary rental relief. We will assess the level of our current distribution as the situation continues to unfold and decide whether we will need to make any adjustments based on what REITs are reporting, and the extent of the actions they may take on their payout ratios.
As of 4 May 2020, the Fund had a current running yield of 6.04%1. There’s no change to the distribution rate as of the date of publication but this is a very fluid situation and we’re monitoring it closely.
4. Why have Asian REITs fared better than AREITs?
Asian REITs are more diversified than AREITs, geographically and across sectors. The AREIT sector has been impacted more because of the concentration of retail REITs and the COVID impact on retail is more direct compared to office and industrial property.
From a valuation point of view, the AREIT sector had a higher valuation starting point with companies like Goodman Group and Charter Hall trading at very high premiums to their net asset values, and therefore the sector had a bigger adjustment in the initial downdraft of the market AREITs larger offshore ownership combined with the plummeting A$ were other contributors to Australia’s underperformance.
5. China’s GDP forecast has been slashed. What effect do you expect this to have on the Fund?
As the second largest economy in the world and given its contribution to global trade, the global impact will be significant. Due to the trade war, exports from China to the US were down 15% last year, but outbound trade to South-East Asian countries like Vietnam and Malaysia have boomed.
This global shock and subsequent slowdown is going to be difficult. The World Trade Organization expects trade volumes to fall by 13-32%. At the same time, governments around the world are in a coordinated stimulus response of unprecedented magnitude. How much this offsets the slowdown is impossible to say but it will certainly help.
Perhaps of more importance is that the search for yield will return. And when it does interest rates will be lower than at any other time in living memory. The Asian REIT Fund is well positioned when that time comes.
