Retail play in China — which REIT to focus on?

As of Sep 2020, there are 4 REITs / Business Trust that focus on retail play in China.

Dasin Retail Trust is highly focused in the Greater Bay Area, while the other three are spread out among Tiers 1 and 2 Chinese cities.

REIT / Business TrustNo. of
properties
Valuation
(RMB $bil)
Valuation
(S$bil)
CapitaLand Retail
China Trust (AU8U)
1319.43.8
Sasseur REIT (CRPU)48.21.6
BHG Retail REIT (BMGU)64.70.9
Dasin Retail Trust (CEDU)711.72.3

China’s Economic Progress from COVID-19

China was the first major economy to emerge from COVID-19 with positive economic growth — Q2 2020 GDP recorded a positive growth after a woeful Q1 2020, growing 11.5% quarter-on-quarter and 3.2% year-on-year, from a 6.8% year-on-year decline in 1Q 2020.

Disposable income per capita grew 1.5% year-on-year in 1H 2020 for urban residents. While retail sales for consumer goods fell 11.4% year-on-year (to RMB 17.2 trillion) for 1H 2020, it recovered to -1.8% year-on-year in June 2020.

Although there was a brief resurgence of Second wave in Beijing on 10 June — breaking a 56-day streak of no locally transmitted cases and one day after the discharge of the last active Covid-19 case from a local hospital — this second wave was quickly quelled by 6 July. This further boosted and brought back confidence in the economic recovery. The Government had demonstrated that it had learnt from its lessons on swift and decisive measures to bring any outbreak quickly under control.

China had brought a whole stew of economic stimulus which were beneficial to the entire nation. These include, required reserve ratio reductions, interest rate cuts, and re-lending to enable M2 money supply and aggregate financing. Other fiscal and support measures were also announced in 1H 2020, which include reduction of property tax, land use tax, social security fund contribution, utilities etc.

End-February

  • Government introduced monetary and fiscal policies to stimulate economy to grow at notably higher rates than last year
  • Cut banks’ reserve requirement ratios and interest rates
  • Accelerated investments in high-tech infrastructures and urbanisation
  • Improve the social security system and income distribution
  • Reduced business costs by including periodic tax exemptions and providing subsidies

March

  • Announced the end of peak COVID-19 outbreak
  • Encouraged enterprises to resume work and production: Most companies returned to work by late-March, with more than 90% of manufacturing plants starting production and around 60% of employees back in office
  • Launched consumption campaign to encourage citizens to “Relax, Eat Out and Shop”, issuing digital coupons to stimulate consumption

April

  • Lifted all remaining transportation curbs and border restrictions in Wuhan
  • Reopened schools in China’s biggest cities

May

  • Government earmarked “Six Priorities” at the Two Sessions meetings to focus on employment, basic livelihood, companies, food and energy security, stable supply chains and smooth operation of government
  • PBOC, CBIRC, CSRC and SAFE jointly issued a total of 26 specific measures to promote trade and investments in the Greater Bay Area

Note: PBOC — People’s Bank of China, CBIRC — China Banking and Insurance Regulatory Commission, CSRC — China Securities Regulatory Commission, SAFE — State Administration of Foreign Exchange

Comparison of the 4 China-focused retail REITs / Business Trust

Gearing Ratio

Due to COVID-19, MAS had raised the regulatory gearing limit to 50% from 16 April 2020. Previously 45%, REITs generally keep their leverage to within 40% maintaining a 5% buffer to respond to ever-changing market conditions e.g. declining property prices.

Sasseur has the lowest gearing among the four, with CapitaLand Retail China Trust closely behind. Their stronger balance sheets position them better with more debt headroom to implement Asset Enhancement Initiatives (AEI) leading to higher operational yield or to acquire more DPU-accretive assets.

P/NAV

All four are generally undervalued, which means you are paying discount (at the current share price) for the underlying net assets. Dasin Retail Trust and BHG Retail Trust are comparatively the most undervalued currently. However, Sasseur, Dasin and BHG have been in the average of the range for the past 5 years.

CapitaR China is almost near the bottom (16.9%) for the P/NAV range, in which it has never been so undervalued before in the last 5 years.

Trailing Twelve Months (TTM) Yield

The TTM Yield provides the recent history of distribution payouts to investors. For example, if a REIT’s TTM Yield is 5.00%, it would have paid out $5,000 to an investor that has $100,000 invested during the previous year.

Sasseur and CapitaR China leads with the highest TTM Yield. BHG and Dasin are poor at under 5%, and considering that this has included the distribution waiver by strategic investors, they could have fared even worst. I will come to it later on why I dislike distribution waiver.

Annualised
total returns
YTD1-yr3-yr5-yr10-yr
CapitaLand Retail
China Trust (AU8U)
-21.8-17.4-3.31.67.0
Sasseur REIT (CRPU)-9.04.7NANANA
BHG Retail REIT (BMGU)-15.7-15.7-2.3NANA
Dasin Retail Trust (CEDU)-1.8-0.48.5NANA

CapitaLand Retail China Trust has the longest history thus far, with the other 3 being relatively newer. Over the last 10 years, shareholders would have enjoyed an annualised 7% returns by holding on to this REIT. Though past performance is not indicative of future performance, I see this big drop in share price now as an opportunity for myself to get onboard.

Waiver of Entitlement to Distribution

Honestly from my personal investment perspective, I disliked this point about distribution waiver, and here is why.

Distribution waiver is initiated usually from the Strategic Investors or Majority Shareholders to provide some initial financial support to the REIT. The waiver is active during the distribution waiver period (usually a few years from IPO) — any dividends will be paid out as normal to non-waived shareholdings; while ignored for waived shares, the allocated dividends is re-distributed to non-waived shareholdings. The proportion of waived shares gradually decrease throughout the waiver period.

Distribution waiver is a reflection of major unitholders’ confidence in long term income growth and for the benefit of other unitholders. However, for the regular investors who do not read in depth into the IPO prospectus or annual reports, the annual distribution per unit (DPU) seemed to be artificially held higher during the waiver period.

Dasin Retail Trust — Major unitholders Aqua Wealth (348,719,572 units or 53.76% direct interest) and Bounty Way (28,208,759 units or 4.35% direct interest) agreed to waive a portion of its entitlement to distributions over a period of approximately five years, commencing from the Listing Date to 31 December 2021.

DPU (c)2017201820192020
W waiver7.167.226.821.92 (1H)
W/O waiver3.253.813.951.35 (1H)

The DPU has been kept average or slightly falling. Without the waiver support, the true dividend yield is almost 40% lower.

BHG Retail REIT — Major unitholder Beijing Hua Lian Group (Singapore) International Trading (148,310,300 units or 29.11% direct interest) agreed to waive a portion of its entitlement to distributions over a period of approximately five years, commencing from the Listing Date to 31 December 2020.

Amount
waivered
201620172018 20192020
S$ mil5.65.45.33.6
DPU (c)20162017201820192020
W waiver5.325.165.473.870.89 (1H)

Similarly, even with the waiver, DPU has been falling. The true dividend is much lower.

Conclusion

REITs are primarily invested for income, not growth or capital gains. Hence I would be concerned with whether my investment is providing me with a steady and increasing DPU over time. I would personally not be vested in BHG Retail REIT and Dasin Retail Trust for now, till the distribution trend over time “without the distribution waiver” becomes clearer.

There are concerns that China’s Q2 2020 GDP growth was driven by pent-up demand from the population and may not repeat the same level of performance going forward. In addition, the growing popularity of e-commerce continues to threaten brick and mortar retail demand. I opined however that the dense population in China is able to support both offline and onsite demand for goods and services. With disposable income per capita rising, we can expect more retail spending to take place, given time.

CapitaLand Retail China Trust and Sasseur REIT are both strong in their respective areas of retail malls and outlet malls. I would continue monitor both closely for opportunities to enter more units, with a higher emphasis on CapitaR China.

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