China tourists overwhelm attractions as travel explodes after Covid

 

CAPITALAND China Trust : AU8U -0.88% (CLCT) posted a 1.6 per cent dip in net property income to 339.1 million yuan (S$65.5 million) for its first quarter ended March, from 344.5 million yuan in Q1 2022.

 

Gross revenue for the quarter was down 2.9 per cent year on year to 475.5 million yuan, from 489.9 million yuan previously.

 

The lower topline figures were mainly attributed to the winding down of CapitaMall Qibao in Shanghai, downtime from asset enhancement initiatives and lag time from committed occupancy handovers.

 

On Tuesday (Apr 25), the real estate investment trust (Reit) manager noted that year-on-year portfolio occupancy fell across all sectors.

 

Retail portfolio occupancy fell marginally to 96.4 per cent in Q1 2023 from 96.8 per cent the year before. Despite this, shopper traffic increased 10.6 per cent and sales climbed 15.4 per cent year on year, nearly reaching pre-pandemic levels.

 

The Reit&rsquo s business park portfolio occupancy declined year on year to 89.8 per cent in Q1, from 94.7 per cent in the same period in 2022. Its logistics park portfolio occupancy fell to 95.6 per cent year on year, from 97.6 per cent previously.

 

The manager of CLCT expects its retail portfolio to shift into positive trajectory in 2023, riding on China&rsquo s reopening and pro-growth policies.

 

With its top tenant sectors aligned with the country&rsquo s policy priorities, the manager is also optimistic that its business park portfolio will benefit from the government&rsquo s turn towards technology development and innovation-driven growth.

 

However, it remains cautious that growth of its logistics park portfolio might be hampered by subdued global demand.

THE largest China-focused real estate investment trusts (Reits) by market capitalisation have outperformed most of their peers listed on the Singapore Exchange (SGX) over the last six months amid optimism about China&rsquo s reopening.

 

CapitaLand China Trust (CLCT) : AU8U 0% and Sasseur Reit : CRPU 0% &ndash the two largest among the five Singapore-listed real estate investment trusts (S-Reits) with purely China-based assets &ndash currently rank among the top five performers when compared to the broader pool of S-Reits and listed business trusts, Bloomberg data showed.

 

CLCT has generated six-month total returns of 11.4 per cent as at Mar 6, assuming dividends were reinvested in the security. This is significantly better than the negative 8.6 per cent average total returns from its peers, and makes it the top performer among S-Reits over this period.

 

Meanwhile, Sasseur Reit&rsquo s total returns of 5.3 per cent also put it in fourth position, behind First Ship Lease Trust and Keppel DC Reit.

 

Analysts believe that the rebounding Chinese economy would continue to benefit these counters, even though challenges from rising interest rates could still weigh on the broader Reits segment.

 

Optimism from China&rsquo s reopening has been one of the key drivers of CLCT and Sasseur Reit&rsquo s outperformance over the last six months, said Vijay Natarajan, analyst at RHB Group.

 

&ldquo These two Reits are predominantly retail sector-focused and thus among the major beneficiaries of removal of Covid-related restrictions,&rdquo he added.

 

&ldquo (They) have also benefited from strong sponsor backing, prudent balance sheet and debt profiles which have helped them to navigate through the challenging funding environment for China-focused real estate players (over the) last two years.&rdquo

 

CGS-CIMB analyst Lock Mun Yee also noted that China&rsquo s reopening could result in increased mobility within the country and improving retail sentiment. The brokerage currently has an &ldquo add&rdquo rating for Sasseur Reit with a target price of S$1.00.

 

&ldquo We think the post-Covid normalisation would continue to provide tailwinds to Sasseur Reit with improved shopper traffic and tenant sales outlook,&rdquo she said. &ldquo This is in addition to Sasseur&rsquo s EMA (entrusted management agreement) rental structure which provides a stable rental base.&rdquo

 

Meanwhile, Derek Tan from DBS Group Research said the reopening of China could be positive for the China-focused Reits in terms of operational outlook with lesser rent rebates. Together with higher tenant confidence, this implies that &ldquo reversionary prospects&rdquo will likely improve.

 

DBS has &ldquo buy&rdquo calls on both CLCT and Sasseur Reit, with target prices of S$1.45 and S$1.05 respectively.

 

Recent economic data from China shows that activity has been rebounding since the government lifted its strict Covid-19 restrictions in December. Last week, data from the National Bureau of Statistics showed that the manufacturing purchasing managers&rsquo index in February stood at 52.6, compared to 50.1 in January. This comes above the 50-point mark that indicates an expansion in activity.

 

But the growth outlook for the country also remains uncertain amid global headwinds from high inflation and interest rates.

 

On Sunday (Mar 5), China set a modest economic growth target of around 5 per cent for 2023 &ndash its lowest in decades. This comes after the economy grew 3 per cent last year, missing the official target of around 5.5 per cent for 2022.

 

While Sasseur and CLCT have outperformed over the last six months, the three smaller China-focused S-Reits on the SGX have not fared as well.

 

BHG Retail Reit : BMGU -1.03%, Dasin Retail Trust : CEDU 0% and EC World Reit : BWCU -8.33% have generated negative total returns over the past six months. As at Mar 6, Dasin Retail Trust and EC World Reit rank among the worst-performing S-Reits, with six-month total returns of negative 30.7 per cent and negative 36 per cent, respectively.

 

&ldquo For Dasin and EC World, there were uncertainties due to their ability to refinance their debt which has resulted in the equity markets pricing in this risk,&rdquo Tan said.

 

RHB&rsquo s Natarajan also noted that, until these refinancing issues are fully resolved, he doesn&rsquo t expect investors to turn their attention towards these Reits.

 

&ldquo For BHG Retail Reit, it has successfully completed its refinancing, but it faces liquidity issues and is thinly traded thus drawing limited investor attention,&rdquo he added. The counter&rsquo s unit price has fallen 4 per cent in the past six months.

 

The broader pool of S-Reits has also faced recent price pressures amid renewed fears of sticky inflation and prolonged high interest rates. Similar to other S-Reits, CLCT and Sasseur Reit have seen their unit prices slip in the past month.

 

CGS-CIMB&rsquo s Lock said: &ldquo The performance of S-Reits was impacted by the prospect of potentially further rate hikes and higher rates for longer as US inflation data remains hot.&rdquo

 

Meanwhile, Tan also noted that the unit price pressure has come amid a spike in 10-year bond yields recently, and the China S-Reits have not been spared.

 

&ldquo As a subsector, (the) outlook remains more optimistic as operational conditions thaw within China itself,&rdquo he said.

 

&ldquo We have observed in past rate hike cycles that share prices tend to bottom out two months before a rate hike pause and return positively over the next six to 12 months after a pause in rate increases. I believe that prices should bottom from then.&rdquo

 

Natarajan added that some of the recent weakness could be due to some of the early exuberance from China&rsquo s reopening fading away.

 

&ldquo The tailwinds for China-focused S-Reits are closely tied to the pace of economic recovery (post-reopening) and rebound in consumer spending,&rdquo he said.

 

&ldquo China is among the few remaining economies with loosening interest rate policy as well as a step-up in government policy support to restart the economy, (which) could be a key catalyst for the sector.&rdquo

SINGAPORE &ndash CapitaLand China Trust (CLCT) on Friday posted a 24.4 per cent year-on-year drop in distribution per unit (DPU) to 3.4 cents for its second half ended Dec 31, 2022, from 4.5 cents a year ago.

 

The lower DPU came despite the real estate investment trust (Reit) releasing $3.6 million from the amount available for distribution to unit holders previously retained in the first half of 2022.

 

Distributable income fell 20.3 per cent year on year to $56.9 million from $71.4 million, impacted by lower retail performance, higher interest expenses and the absence of one-off proceeds, said the Reit&rsquo s manager.

 

The decline in second-half performance can also be attributed to higher rental relief provided for tenants whose operations were affected by long periods of Covid-19 lockdowns during the year, particularly in the second half, the manager noted.

 

The manager&rsquo s chief executive, Mr Tan Tze Wooi, expects the Reit&rsquo s retail portfolio to shift to a positive trajectory in 2023 following China&rsquo s easing of Covid-19 restrictions.

 

CLCT&rsquo s portfolio is &ldquo well-placed to capitalise on growth opportunities across multiple sectors&rdquo , said Mr Soh Kim Soon, chairman of the Reit manager.

 

Gross revenue was down 8.6 per cent to $183.9 million for the half-year period, from $201.1 million a year ago, mainly due to a decline from the retail portfolio as most of the Reit&rsquo s China malls were mandated to close for various days in the second half of 2022.

 

Net property income (NPI) fell 11.8 per cent year on year to $114.7 million for the half-year, from $130.1 million.

 

The latest set of second-half results brought CLCT&rsquo s financial year 2022 DPU to 7.5 cents, down 14 per cent from 8.73 cents in financial year 2021, as the top-line increase was dragged by finance costs and taxes.

 

Gross revenue for the full year rose 1.4 per cent to $383.2 million from $378 million, as the provision for rental relief in the second half was more than offset by higher contributions from new acquisitions. The NPI for financial year 2022 increased 1.5 per cent to $254.2 million.

 

The business parks and logistics parks segments showed positive year-on-year performance for the year ended Dec 31, compared with financial year 2021.

 

In contrast, the retail malls segment saw a decline in gross revenue, falling by 6.5 per cent to $260.3 million in financial year 2022. The NPI for the segment also fell, dropping 8.7 per cent to $164.1 million.

 

CLCT&rsquo s retail assets, business parks and logistics parks registered positive rental reversions for financial year 2022 and achieved steady occupancy of 95.4 per cent, 91.4 per cent and 96.4 per cent respectively as at end-2022, with improved tenant quality.