Overseas retail Reits: Tread with care
RETAIL real-estate investment trusts (Reits) are popular because they are seen as defensive investments - after all, people will shop, no matter how the economy is doing.
Also, their annual yield is about 6 per cent, far higher than bank deposit rates.
Overseas retail Reits present an additional interesting proposition - they are "safe" in the sense that they include well-located malls that will mint money, no matter what the condition of the economy is, and they expose investors to spending power in China and Indonesia - which have the largest number of potential middle-class consumers in the world.
But because earnings are in a foreign currency, and the malls are located in a less certain political environment, the risks of investing in them might clash with investors' original intent to invest in "safe" assets.
For one thing, the malls they own are remote.
Also, higher potential returns in the medium to long term come with currency depreciation risks in Indonesia, the risk of China slowing down, cooling retail rents in Hong Kong, and rising interest rates in general.
Four Reits listed here fall in the overseas retail category - Fortune Reit, Mapletree Greater China Commercial Trust (MGCCT), CapitaRetail China Trust (CRCT) and Lippo Malls Indonesia Retail Trust.
While all four appear to have strong sponsors, each has different debt profiles and property characteristics.
Leases for some of Lippo Reit's malls are granted under the Hak Guna Bangunan (HGB) title, with terms of 30 plus 20 years. So leases for some malls expire as early as 2020.
Thereafter, a new title or renewal has to be granted by the authorities. Similarly, leases for many Hong Kong properties expire in 2047. This affects Fortune Reit and MGCCT. For CRCT, leases also expire in the 2040s.
Distributions might plummet if leases cannot be renewed, and current distributions become a return of investors' monies.
Reits might also need to pay hefty sums to governments to secure lease renewals.
In contrast, leases for shopping malls here tend to be on 99-year terms. This gives more certainty to their cashflows.
Looking ahead, South Korea's Lotte Shopping could list its mall assets here in an initial public offering to raise more than $1 billion.
The initial public offering was to have happened earlier this year, but it ran into a snag after Lotte reportedly planned to offer a yield of 6 to 7 per cent, but investors demanded more.
This is a good gauge of market sentiment.
With yields on long-term risk-free bonds expected to go up to 4-plus per cent, and with Reit investors demanding, say, two to three percentage points above risk-free rates, investors should buy only Reits that give a projected yield of 7 per cent or so.
All else being equal, Reits with overseas properties might require an additional percentage point of yield, given higher market, political and currency risks.
On the other hand, their potential growth could justify a lower yield.
MGCCT currently offers the highest yield. Better-than-forecast results on top of a price slide since its IPO have bumped up its projected yield to 7 per cent.
The Reit, however, is reliant on just one major property for its earnings.
Lippo looks less attractive in the short term (Disclosure: writer has a small stake). The Indonesian rupiah has been weak and domestic demand is likely to be curbed by high interest rates as the Indonesian central bank tries to control inflation.
Both Fortune and CRCT have earnings catalysts in newly acquired malls. But a cloud is hanging over both Hong Kong and China due to fears of a China economic collapse.
Still, the next time you go on holiday to Jakarta, Beijing or Hong Kong, try to do your shopping in some of the malls these Reits own.
No harm getting some market research done, along with your retail therapy.