CapitaLand China Trust’s Q1 2023: What China S-REIT Investors Should Know

April 25, 2023

CapitaLand China Trust REIT

The current earnings season in Singapore has many investors looking towards updates on a trend that has been consistently highlighted; China’s reopening.

With Covid-Zero in China abandoned towards the end of last year, many stocks associated with China’s reopening have been touted to perform well.

One of the purported beneficiaries from the Singapore REITs market is CapitaLand China Trust (SGX: AU8U) – a retail, business park, and logistics REIT that has a China-only portfolio of properties.

Given the China-focused REIT released its Q1 2023 business update this morning (25 April), what should S-REIT investors know and is the REIT seeing the benefits of China’s reopening? Let’s find out.

Retail occupancy up as shopper traffic recovery continues

For the first quarter of 2023, CapitaLand China Trust recorded a 1.6% year-on-year fall in net property income to RMB 339.1 million (S$65.5 million).

Likewise, the REIT’s gross revenue was down 2.9% year-on-year to RMB 475.5 million.

Both these declines were attributed to the winding down of its CapitaMall Qibao in Shanghai as well as ongoing asset enhancement initiatives (AEIs).

However, the good news was that occupancy in its retail portfolio – which makes up around 69% of the REIT’s total gross rental income (GRI) – improved sequentially.

At the end of Q1 2023, its retail portfolio had an occupancy rate of 96.4%, up a full percentage point from 95.4% at the end of December 2022.

However, this was down from 96.8% from the year-ago period.

The positive trends came from shopper traffic at its properties as well as tenant sales, both of which were up strongly year-on-year in Q1 2023 (see below).

CapitaLand China Trust retail trends Q1 2023

Source: CapitaLand China Trust Q1 2023 business update

Indeed, tenant sales are nearly at pre-Covid levels – having reached 95% of levels seen in 2019.

Falling occupancy across business park and logistics

While the positive news of better retail trends lifted the bulk of its portfolio in Q1 2023, the occupancy numbers for its business park and logistics segments were disappointing.

These two segments are under the “new economy” portion of CapitaLand China Trust’s portfolio.

The REIT’s business park segment – which has five properties in three Chinese cities – saw its portfolio occupancy drop to 89.8% as of the end of Q1 2023.

This was down from 91.4% at the end of December 2022 and also down from 94.7% at the end of March 2022.

Meanwhile, CapitaLand China Trust’s logistics segment – which has four properties in four cities – recorded an occupancy rate of 95.6% as of the end of March 2023.

Again, this was down both sequentially and year-on-year, from 96.4% as of the end of December 2022 and 97.6% as of the end of March 2022, respectively.

Watch rental reversions for the rest of 2023

Overall, while it was a positive quarter for its retail portfolio, investors should monitor how this plays out in the rest of 2023.

That’s because 22.4% of its retail portfolio’s leases – by GRI – are up for renewal for the remainder of 2023.

Meanwhile, management did note that while retail is showing positive signs in terms of recovery, the logistics sector in China could be adversely impacted by potentially subdued global demand.

While it could very well be a “China reopening” story, REIT investors in Singapore should remember that CapitaLand China Trust’s distribution per unit (DPU) actually fell 14.1% year-on-year in FY2022 to 7.50 Singapore cents.

Management’s talk of shifting towards a more new economy-oriented portfolio is positive but it also has to be accompanied by improvements in the fundamentals of its portfolio and, crucially, the DPU.

At its current share price, CapitaLand China Trust is giving dividend investors a yield of 12-month trailing of 6.6%.

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.

Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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