Asia Tea Time - Cup 69 ☕

September 07, 2024 • Estimated Reading Time: 5 minutes

This week I talk a large acquisition by Singapore’s biggest REIT and how to think about recessions in the world’s largest economy. 

Macro in Asia

CapitaLand Integrated Commercial Trust to acquire 50% stake in ION Orchard

CapitaLand Integrated Commercial Trust (SGX: C38U), Singapore’s largest REIT by market capitalisation, earlier this week proposed to acquire a 50% interest in the iconic ION Orchard shopping mall for S$1.85 billion from its sponsor, CapitaLand Investment (CLI).

The deal is likely to close in the fourth quarter of this year and will be immediately distribution per unit (DPU) accretive. 

Why it’s happening

  • CICT wants to up its property portfolio presence in key Singapore downtown shopping areas, where it already has a few properties like Plaza Singapura, Raffles City, and Funan.

  • Management also cited the expected benefits from the tailwinds of tourism and generally healthy Singapore economy. 

Why it matters

  • It’s a sizeable acquisition and, given how long we’ve been in the current high-interest rate environment, could signal that Singapore REIT operators are finally seeing some “light at the end of the tunnel” in terms of rate cuts.

  • With the size and heft of CICT behind it, ION Orchard could achieve a higher occupancy rate as the REIT looks to be proactive and rejuvenating the existing tenant base and space. 

What’s next?

  • Look out for the US Federal Reserve’s FOMC meeting from 17-18 September as we’ll understand there where interest rates are heading over the short term. That’s really going to determine sentiment for rate-sensitive sectors like REITs. 

Tim’s Take 

  • You don’t see many big, big acquisitions in Singapore’s property market from the local REITs but this is certainly one of them.

  • ION Orchard is one of the most upscale malls in the city state and has been independently valued to be worth just shy of S$3.7 billion.

💡

Singapore’s largest REIT has a mixed track record in terms of being able to create shareholder value. While its origins began as CapitaLand Mall Trust (CMT), it then merged with CapitaCommercial Trust (CCT) to become what it is today – CICT. 

But shareholders haven’t really seen the benefits of its scale all that much. Its share price is still down over 20% over the past five years while it’s still about 30% off the highs it reached just before the Global Financial Crisis (GFC) in 2007. 

The revamped REIT is certainly hoping this acquisition can help it grow larger in its home base of Singapore. Indeed, the ION deal is a sign that the REIT is fully committed to the Lion City.

Yet its downtown malls are typically seen as places for discretionary purchases, i.e. they’re easy to not visit if economic conditions go south.

And therein lies a big problem. There’s talk of a recession on the horizon for the US – and potentially the world – which means that luxury shopping that relies on tourists may not be an area that holds up so well.

Meanwhile, as I’ve recently been saying, looking to reliable retail REITs in Singapore typically means focusing on the “heartlands” where Frasers Centrepoint Trust has a stronghold. 

  • So, while the CICT acquisition may grab the headlines for its size and “wow factor”, it’s the boring, staid REITs (that get the job done) which typically fly under the radar. 

Tim’s money tip of the week

We are starting to see markets get jittery about all the poor economic data coming out of the US, the world’s largest economy. When that happens, stock prices tend to fall.

The S&P 500 Index is down around 4.6% over the past week given all the poor sentiment surrounding the US economy.

But economic recessions are completely normal. It’s important we remember that. Just like stock market declines of at least 10%, economic recessions happen every so often.

And just like stock prices, economies can’t keep growing forever – they need to take a breather.

In fact, since the end of the Great Depression in 1933, there have been a total of 14 recessions in the US. A recession is officially defined as two consecutive quarters of negative GDP growth.

After 1945, the average recession has actually only lasted around 10 months so – while we might not like it – there is some consolation in that they don’t tend to last that long. Remember, stock market “corrections” (defined as a fall of at least 10% from a recent high) typically happen once a year – super common.

So, when we’re focused on the headlines and the data, it’s also important to zoom out and look at the longer-term charts. That should make us feel much better as investors.