How Retail REITs Can Safeguard Your Retirement In Singapore

While we’re all familiar with the shopping experience in malls such as ION Orchard, Vivocity and Waterway Point, very few of us are familiar with the concept of investing in these shopping malls for a steady passive income stream for our retirement planning.

In this article, we’ll explore why investing in Retail REITs can be a smart strategy to safeguard your retirement in Singapore and what are the things you need to pay attention to.

For the scope of this article, I will only be referring to retail properties IN Singapore and not offshore retail properties.

The Benefits of Retail REITs

Resilient Shopping Culture In Singapore

Singaporeans are known for their vibrant shopping culture, with malls being a central hub for both retail and social activities. From bustling shopping streets like Orchard Road to neighbourhood malls that serve as community centres, shopping is ingrained in the daily lives of many residents.

This cultural affinity for retail has contributed to the long-term stability of the retail sector, even during times of economic uncertainty. I’d go as far as to say that Singapore’s shopping culture is much more robust than other parts of the world which is why we are home to hundreds of malls despite only having a population size of 6 million.

As much as we like to complain that the malls in Singapore are very similar to one another and worry about the trend of eCommerce, the statistics of the performance of retailers remained quite stable as seen from the nominal retail sales growth rate.

While the headwinds caused by e-commerce are undeniable to traditional FMCG retailers, modern shopping malls have also been re-designing the use of their space to accommodate new tenants catering to the change in shoppers’ behaviour.

For instance, many malls are integrating e-commerce into their physical spaces, providing hybrid shopping experiences that combine online ordering with in-store pickups or experiential zones that enhance customer engagement.

Key takeaway:

Given the evolution of retail spaces coupled with the strong Singaporean shopping culture, Retail REITs in Singapore are well-positioned to provide investors with the rental stability and hence income consistency that we need for our retirement.

Stability in Recessionary Periods

Riding on the first point on resiliency in Singaporean shopping culture, contrary to popular belief, Retail REITs in Singapore offer a more defensive behaviour than other REIT sectors.

This is because in times of economic uncertainty, essential retail services such as supermarkets, healthcare outlets, and pharmacies continue to attract customers even during market downturns, ensuring that Retail REITs maintain strong occupancy rates and stable income.

While it is true that some tenants (consumer discretionary) may be more sensitive to the economic cycle, given that the majority of the tenants of Singapore Retail REITs are well-established brands, it is unlikely that they will forsake their tenancy during times of economic hardship as they have the resources to weather through the hard times.

This can be seen from the stability in occupancy rates in the Singapore retail portfolio of the listed REITs:

Key takeaway:

As investors, we will inevitably be exposed to the impacts of the economic cycle but with the use of Retail REITs, investors can have peace of mind that the occupancy of our properties will remain resilient regardless of the ups and downs in the economy.

Things to Watch Out For

While Retail REITs offer stability, diversification, and growth potential, it’s essential to consider certain factors that can impact their performance. Here are two key points to watch out for when evaluating Retail REITs:

Short Weighted Average Lease Expiry

The Weighted Average Lease Expiry (WALE) of a Retail REIT refers to the average remaining lease term of all tenants, weighted by the size of each tenant’s lease.

Unfortunately, the WALE of Singapore retail properties are often very short (2 to 3 years) which can be a double-edged sword in the form of:

Higher Risk of Tenant Turnover: With leases expiring soon, the REIT may face increased tenant turnover, leading to potential vacancies and reduced rental income. This risk can be amplified by the need to attract new tenants, which increases marketing and leasing costs.
Opportunity for Rental Reversion: Shorter leases offer REIT managers the chance to negotiate higher rents when renewing leases, especially in a strong market. This can lead to higher income for investors.

Key takeaway

When evaluating Retail REITs in Singapore, we should always pay attention to the property manager's ability to generate positive rental reversions and tenancy retention to avoid investing in malls with high tenant turnover which may be a sign of a poorly managed mall.

Relying on the occupancy rate indicator alone might not be sufficient to understand the quality of the REIT manager nor the quality of the underlying malls in the portfolio. A combination of a few indicators is necessary.

Sub-Urban v.s. Central Malls

Not all Retail REITs are created the same, the type of retail property within a REIT’s portfolio significantly influences the tenants, shoppers, and stability of rental income. Retail REITs in Singapore can generally be categorized into two main types:

Central Malls: These are located in prime, high-traffic areas such as Orchard Road. Central malls attract a mix of high-end retailers, international brands, and tourists, making them more sensitive to economic cycles. While they can command higher rents, they are also vulnerable to fluctuations in consumer spending and downturns in the tourism industry.
Sub-Urban Malls: Located in residential areas such as Tampines or Bishan, sub-urban malls cater primarily to residents. These malls focus on everyday essentials such as groceries, healthcare, and dining. As a result, they are generally more resilient during economic downturns, as tenants provide essential services that people continue to use.

While sub-urban malls may offer lower rental yields compared to central malls, they also present a more stable, necessity-driven income stream. The risk of tenant turnover is lower, and the consistent foot traffic from residents provides reliable income over the long term.

Key Takeaway:

Consider the mix of sub-urban and central malls in a Retail REIT's portfolio. Suburban malls offer stability and resilience, while central malls offer the potential for higher returns but come with increased risk. A well-balanced portfolio can capture both steady income and growth opportunities.

Conclusion

Contrary to popular belief, Retail REITs can provide investors with a consistent passive income in a stable manner making them a valuable asset in any retirement portfolio.

The resilience of Singapore’s retail sector, driven by strong local consumer demand and shopping culture, helps retail properties maintain steady foot traffic and rental income even during economic downturns.

However, as with any REIT investment, it's crucial to be mindful of key factors such as Weighted Average Lease Expiry (WALE) and the type of retail properties — whether sub-urban or central malls.

With proper due diligence, Retail REITs can play a pivotal role in creating a well-rounded, resilient investment strategy.

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