You will be able to explain what drives income in retail and office REITs and the risks each faces.
On a weekday afternoon, the mall near Darren's flat is full of families buying groceries, students in the food court and retirees at the clinic. The big mall in town where he used to work is quiet until the lunch hour, then packed, then quiet again. Both are owned by S-REITs. Both collect rent. The things that decide how much rent they collect are not the same.
This module goes through the REIT sub-sectors one pair at a time, starting with the two that most Singapore investors meet first.
A retail REIT earns rent from shops, restaurants, supermarkets, clinics, tuition centres and services in its malls. Tenants can only keep paying that rent if they make enough sales, so a retail REIT's income depends on how much its tenants sell. Two things feed that: how many people come through the doors, called footfall, and how much they spend once inside.
The tenant mix matters as much as the footfall. A mall anchored by a supermarket, food outlets and services people need every week tends to hold its traffic when the economy slows or when people buy more online. A mall leaning on fashion or discretionary spending is more exposed to both.
That is where the difference between suburban and downtown malls comes from. Suburban malls, close to housing estates and transport nodes, rely on residents' everyday needs. Downtown malls, in the shopping belt and business district, rely more on office workers, tourists and shoppers who travel in. When tourists stop coming or office workers stay home, downtown malls feel it first. Suburban malls tend to be steadier, but they rarely see the same bursts of demand.
Many retail leases in Singapore include, on top of a fixed base rent, a share of the tenant's sales above a set level. This is often called gross turnover rent. When tenants do well, the REIT shares in it. When sales fall, that part of the rent shrinks, though the base rent still has to be paid.
The annual report or results presentation usually says what share of gross rent came from turnover rent. A higher share means income moves more with tenant sales, which helps in good years and hurts in bad ones. Tenant sales figures, if the REIT reports them, are worth watching for exactly that reason.
An office REIT earns rent from businesses that lease floors in its buildings. Its income depends on how much office space businesses want, and on how much competing space is available.
Demand comes from hiring and from how firms use space. When businesses grow and add staff, they lease more. When they cut, or when they decide fewer people need a desk every day, they lease less at the next renewal. The shift to hybrid working has made the second question a live one. A firm that brings staff in three days a week may decide it needs fewer floors, and that decision shows up when its lease comes up, not before.
Supply matters as much. New office towers take years to build, and when several are completed at once, landlords compete for tenants and rents soften. The Urban Redevelopment Authority publishes data on office supply in the pipeline. Check the current figures there when you judge an office REIT's next few years.
Office REITs often have fewer, larger tenants than retail REITs. A bank, a technology firm or a law practice might take several floors. That makes two things matter more.
The first is tenant concentration: what share of income comes from the top tenants. If the largest ten tenants pay half the rent, losing one or two hurts. The annual report lists the top ten tenants and their share of income.
The second is lease timing. Large tenants often sign leases that end in the same year, especially if they moved into a new building together. If a big block of leases expires in one year, the REIT faces a cluster of negotiations, and in a weak market, a cluster of possible vacancies. Lesson 5.3, WALE, occupancy and rental reversions, showed you the lease expiry chart. For an office REIT, also check which tenants sit in the big bars.
Darren checked his town mall's office tower neighbour, owned by a different REIT, and found that one tenant paid a large share of that building's rent and had a lease ending within two years. Nothing was wrong yet, but he knew which announcement to watch for.
Retail and office REITs both depend on Singapore's economy, but through different channels. Retail depends on consumers and footfall, office on employers and their space decisions. A slowdown can hit both, but not always at the same time or in the same way.
In the activity you will pull the top ten tenants and the leases due in the next two years for one retail and one office S-REIT, and the two lists will show you how differently their income is exposed.
For one retail and one office S-REIT, list the top ten tenants' share of income and the leases due in the next two years.
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