INVESTORS who bought into the initial public offerings (IPOs) of the four China-focused property trusts backed by Chinese sponsors that listed here between 2015 and 2018 would be licking their wounds. 

 

Based on unit prices as at Mar 1, BHG Retail Reit : BMGU 0%, Dasin Retail Trust : CEDU -9.09% and EC World Reit : BWCU -4.94% traded between 39 per cent and 75 per cent below their IPO prices.

 

Among the quartet, Sasseur Real Estate Investment Trust : CRPU +1.32% traded closest to its IPO price - at S$0.77 per unit, or 4 per cent versus its IPO price of S$0.80.

 

Investors may do well to take a look at this real estate investment trust (Reit) to ride on what is arguably 2023&rsquo s mega investment story - China&rsquo s reopening after abandoning its pursuit of a zero-Covid strategy.

 

Last year was tough for Sasseur Reit, which owns four outlet malls in China. Recurrent Covid-19 outbreaks and related restrictions weighed on consumer confidence in China. Covid curbs led to shortened operating hours and temporary closures of the trust&rsquo s outlet malls.

 

Sasseur Reit&rsquo s distribution per unit (DPU) fell 7.8 per cent in 2022 as outlet sales dropped 15.5 per cent year on year (y-o-y). Meanwhile, the trust&rsquo s net asset value (NAV) per share declined 12.1 per cent from end-2021 to S$0.87 as at end-2022. 

 

While valuations of investment properties in local currency terms were stable, the trust&rsquo s property valuations in Singapore dollars were hit by the renminbi weakening by about 9 per cent against the Singapore dollar.

 

Compelling valuation

 

Still, Sasseur Reit&rsquo s DPU for 2022 is broadly in line with that achieved pre-pandemic in 2019. Based on unit price as at Mar 1, Sasseur Reit traded at historical DPU yield of 8.5 per cent and discount to NAV of 11 per cent.

 

Sasseur Reit&rsquo s DPU yield is higher than that of Frasers Centrepoint Trust : J69U -0.89% (FCT), which is a large mall owner in Singapore. Based on unit price as at Mar 1 and last financial year DPU, FCT traded at yield of 5.5 per cent.

 

As at Mar 1, CapitaLand China Trust : AU8U +1.72% (CLCT), which owns malls, business parks and logistics parks in China, traded at DPU yield of 6.4 per cent, based on DPU for 2022, and discount to end-2022 NAV of 14 per cent.

 

Compared to the Singapore five-year government bond yield of nearly 3.4 per cent per annum as at end-February, Sasseur Reit&rsquo s DPU yield offers a positive spread of over 510 basis points.

 

China reopening play

 

Crucially, Sasseur Reit should enjoy strong DPU growth due to China&rsquo s reopening. 

 

Many Asian destinations, including Singapore, are hoping to get a boost from welcoming Chinese visitors in large numbers. But the effects of China&rsquo s reopening may be felt most in China itself. 

 

China&rsquo s economy may grow by 5.2 per cent this year, up from 3 per cent in 2022, according to the International Monetary Fund. 

 

The Chinese economy should benefit from pent-up consumer demand, as the household savings rate averaged 33 per cent during the pandemic period Q1 2020 to Q3 2022, compared to the 2015-2019 average of under 30 per cent.

 

There are promising signs of consumer spending rising in China. Over this year&rsquo s Chinese New Year holiday period, revenue from domestic tourism rose 30 per cent y-o-y and restaurant revenue was up nearly 25 per cent y-o-y. 

 

Sasseur Reit benefits if sales at its outlet malls located in Chongqing, Hefei and Kunming grow, as it has income that is linked to sales at these malls. 

 

China&rsquo s retail landscape is competitive. Still, Sasseur Reit brings a differentiated offering. Its outlet malls are large in scale, offering choice to consumers. The properties are also well-designed, which enhances the shopping experience. And consumers can buy competitively-priced branded goods at these outlet malls.

 

The outlet malls have an active membership programme that helps build customer loyalty. The number of VIP members in Sasseur Reit&rsquo s portfolio has grown by a compound annual growth rate of nearly 39 per cent between end-2018 and end-2022. 

 

Over the longer term, efforts by Chinese policymakers to grow discretionary spending power for the middle-income population bode well for Sasseur Reit as its outlet malls target such customers.

 

Balance sheet strength

 

The other key reason to like Sasseur Reit&rsquo s prospects is that the trust has a strong balance sheet. New loan commitments to refinance outstanding loans due in March have been secured. And the trust has no significant refinancing requirements until 2026.

 

Sasseur Reit&rsquo s aggregate leverage was 27.6 per cent as at end-2022. It can take on around S$791 million more in debt to fund new acquisitions, based on the 50 per cent leverage limit for Reits. Aggregate leverage refers to the ratio of a trust&rsquo s total debt to its total assets.

 

Perhaps Sasseur Reit will soon make a yield-accretive acquisition of an outlet mall in Xian or Guiyang, where the trust has right of refusal from its sponsor Sasseur Group. 

 

Founded by Xu Rongcan, Sasseur Group has 30 years experience focusing on outlet operations in China. Besides the malls held in the Reit, the sponsor has 12 operating outlet malls in China as well as two upcoming ones.

 

Local Reit investors tend to have a home market bias, preferring Singapore-centric trusts and/or those that have strong local groups as sponsors. In a Reit market where investors are spoilt for choice and more demanding amid higher interest rates, Sasseur Reit&rsquo s manager could face a tough task in winning over more investors.

 

China has started its Reit market with infrastructure Reits. If Reits owning commercial buildings start to feature big in China&rsquo s Reit market, Sasseur Reit could potentially move its listing from Singapore to China to seek better valuation.

 

Sasseur Reit rides on favourable trends. Will investors warmly embrace the Reit&rsquo s story? The answer to that may in turn impact Singapore&rsquo s continued ability to draw Reits that own overseas assets to list here.