Explain what drives income in retail and office REITs, and the risks each one faces.
Pick one retail S-REIT and one office S-REIT you know, and download the latest annual report for each. Retail and office are the two sub-sectors most Singapore investors meet first, so they are the first pair in this module, which covers the REIT sub-sectors one pair at a time. Both collect rent from Singapore properties, but different forces decide how much, and the annual report shows where each is exposed.
Darren (an invented example) lives in a flat near a suburban mall and used to work at a big mall in town. On a weekday afternoon, the mall near his flat is full of families buying groceries, students in the food court and retirees at the clinic. The town mall is quiet until the lunch hour, then packed, then quiet again. S-REITs own both malls and both collect rent, but different things decide how much rent each one collects.
A retail REIT earns rent from the shops, restaurants, supermarkets, clinics, tuition centres and services in its malls. Tenants can keep paying only if their sales are high enough, so the REIT's income depends on tenant sales. Those sales depend on footfall, the number of people who come through a mall's doors, and on how much those people spend once inside.
Tenant mix, the kinds of tenants in a mall, matters as much as footfall. A mall anchored by a supermarket, food outlets and weekly-need services tends to keep its traffic during an economic slowdown or a shift to online buying. A mall that leans on fashion or discretionary spending is more exposed to both.
Location matters too. Suburban malls, like the one near Darren's flat, sit near housing estates and transport nodes and depend on residents' everyday needs. Downtown malls sit in the shopping belt and business district and depend more on office workers, tourists and shoppers who travel in. When tourists stop coming or office workers stay home, downtown malls are hit first. Suburban malls tend to be steadier but rarely get the same bursts of demand.
Some Singapore retail leases have a fixed base rent, which the tenant owes whatever its sales, and a separate part linked to the tenant's sales, often called gross turnover rent. How the turnover part is worked out is set by each lease, so it is not the same for every tenant. When tenant sales rise, the REIT shares in the gain. When sales fall, the turnover portion shrinks, but the tenant still owes the base rent. The annual report or results presentation usually states 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, so watch tenant sales figures if the REIT reports them.
To check a retail REIT, see whether the tenant mix leans toward needs-based anchors (supermarket, food, services) or toward fashion and discretionary spending, note whether the mall is suburban or downtown, find the turnover rent share, and look for tenant sales figures.
An office REIT earns rent from businesses that lease floors in its buildings. Its income depends on how much space businesses want and how much competing space is available.
Demand comes from hiring and from how firms use their space. Growing firms lease more. Firms that cut staff, or decide fewer people need a desk every day, lease less at the next renewal. Hybrid working has made space use a live question: a firm bringing staff in three days a week may decide it needs fewer floors. A decision to cut space shows up when the lease comes up for renewal, not earlier.
Supply matters as much as demand. New office towers take years to build, and when several are finished at once, landlords compete for tenants and rents soften. The Urban Redevelopment Authority (URA) 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, such as a bank, a technology firm or a law practice taking several floors. That makes two things matter more. Tenant concentration is the share of income from the top tenants, and the annual report lists the top ten tenants and their share of income. If the largest ten pay half the rent, losing one or two hurts.
Lease timing is when leases expire, especially big blocks ending in the same year. Large tenants often sign leases that end in the same year, particularly if they moved into a new building together. A large block expiring in one year means 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. Go back to it, and for an office REIT also check which tenants sit in the big bars and whether leases cluster in one year.
Darren did this for the office tower next to the town mall, owned by a different REIT. One tenant pays a large share of that building's rent, and its lease ends within two years. Nothing is wrong yet, but he now knows which announcement to watch for.
Both sub-sectors depend on Singapore's economy through different channels: retail through consumers and footfall, office through employers and their space decisions. A slowdown can hit both, but not always at the same time or in the same way.
Return to the two annual reports. For the office REIT, check URA data for office supply in the pipeline. Then, for each REIT, pull the top ten tenants with their share of income and list the leases due in the next two years, noting which tenants sit in the big bars of the expiry chart. Put the two lists side by side to see how differently the two REITs' income is exposed.
Pick one retail and one office S-REIT. For each, write down the top ten tenants' share of income and the leases that expire in the next two years.
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