China's Insatiable Appetites Boost BHG Retail REIT

This article by Jennifer Tan (left, Director, Research & Products,  Equities & Fixed Income, at the Singapore Exchange) was published in SGX's kopi-C: the Company brew series on 28 July 2017. The article is republished with permission.

Third Space

BHG Retail REIT is the first pure-play China retail real estate investment trust sponsored by an established China-based retail property operator. Listed on SGX Mainboard in December 2015, the REIT aims to invest directly or indirectly in a diversified portfolio of income-producing real estate and real estate-related assets used primarily for retail purposes (wholly or partially), with an initial focus on China.

With a current market capitalisation of over S$365 million, BHG Retail REIT has generated a total return of 16.5% in the 2017 year-to-date, compared with the benchmark Straits Times Index's (STI) 17.8%, and the broader FTSE ST All-Share Index's 17.0%.

The manager of the REIT - BHG Retail Trust Management - is an indirect, wholly owned unit of the Sponsor, Beijing Hualian Department Store Co Ltd, which listed on the Shenzhen Stock Exchange in May 1998. The Sponsor is part of the Beijing Hualian Group, which has more than two decades of experience in managing retail properties, as well as operating supermarkets and hypermarkets.

The REIT owns a diversified portfolio of five retail properties strategically located in major Chinese cities. These assets have a total net lettable area of about 156,000 square metres, and average occupancy rate of over 98%. The portfolio comprises a 60% interest in Beijing Wanliu Mall, Chengdu Konggang Mall, Hefei Mengchenglu Mall, Xining Huayuan Mall and Dalian Jinsanjiao Property.

The malls are located in high-density population areas frequented by middle-class professionals and families. Designated as lifestyle destinations, the anchor tenant or master lessee in every mall is the highly popular Beijing Hualian Hypermarket Co.

The very deliberate positioning of the malls ensures they remain relevant to the broader community, Chan said.

"We're in the business of running retail malls, but they're not just money-spinners for us - they function to serve the community," she noted.

"In China, homes are getting smaller and traffic jams are on the rise, so people enjoy spending time in a third space - outside the home, office or school.

This space is sacrosanct, and plays an important role in enriching their lives.

We're working with our tenants and shoppers to make the mall a happy and positive space for them."

The five properties in the REIT's portfolio are similar to Jurong Point, Singapore's largest suburban mall located in the west, and Tampines Mall, another heartland mall situated in the east.

"We won't shy away from who we are, and we'll stay true to our positioning through our tenant mix, activities and promotions," she added.

Asset enhancement efforts are also a key element in the REIT's strategy. "We make it a point to communicate with shoppers regularly - through WeChat, emails and face-to-face surveys - so we can bring in products and brands that they want."

For example, its Chengdu Konggang Mall is being refurbished to elevate the mall's active lifestyle offering, due to rising demand for sporting goods and services from a relatively young demographic in its vicinity. This enhancement initiative, which is on track to be completed in the third quarter of 2017, has boosted occupancy levels in the mall and added new brands such as Nike, Adidas and New Balance.

"As long we stay relevant to the community, the revenues will come in," Chan said.

The relatively shorter lease tenures for its tenants also work in the REIT's favour. "In China, it's not uncommon to have one- to three-year leases, which give us a chance to raise rentals or refresh the tenant mix upon expiry. The majority of our leases also come with a yearly in-built escalation and gross turnover component," she added.

Shifting Demands

A more pertinent issue, instead, is how to keep up with constantly evolving consumer demands.

"Many Chinese travel widely now, such as having visited Southeast Asia, and they want to be able to savour different kinds of cuisine, such as Thai food or chilli crab, in the malls. Social media provides them with information on the latest trends, so they want not just yoga, but aerial yoga!"

The focus on brands is also paramount. "Customers desire better and better products. They ask for imported brands because one, they can afford it, and two, they want the very best for themselves and their children."

But trends can change very quickly - what's popular today can become passe tomorrow, Chan noted, pointing to cheesecake fads. "As an operator, we need to monitor and keep up with these shifts in demand."

And staying in tune with what's current means reading widely. A voracious reader, Chan spends her time outside the office researching on topics ranging from art and history to health and food. "I enjoy learning about anything and everything," the gregarious 44-year-old said with a laugh.

Being a good listener is also an important part of the learning process, she pointed out.

"We should listen more than we speak. There's always something to glean from everyone you meet - even a five-year-old can have words of wisdom to share."

Chan, who is married to a pilot and has three dogs, believes in carving out "me time". After attending the General Management Programme at Harvard Business School in 2012, she realised the importance of managing herself.

"We were encouraged to spend 50% of our time managing ourselves, as opposed to managing our staff, bosses or peers," she said.

"Only when we're able to handle ourselves and our emotions, can we manage the other aspects of our lives well - that really hit home for me."

By extension, understanding yourself is critical, she added.

"By spending time alone and being still - when you're calm and your mind is clear - that's when you can find your direction and focus. Only when you are focused will you be able to make the right decisions and achieve your goals."

Financial results

*average SGD:CNY translation rate of 1:4.864 and 1:4.643 used for 1Q 2017 and 1Q 2016 respectively.
^with effect from 1 May 2016, Value Added Tax replaced Business Tax in China, and is net off revenue instead of reflecting in property operating expenses.
~with effect from 1 July 2016, the Beijing State Government aligned its tax policy with the national practice of charging property tax based on rental income, which resulted in higher property-related tax expenses for Beijing Wanliu Mall.

Source: Company data

BHG Retail REIT

BHG Retail REIT is the first pure-play China Retail REIT sponsored by a leading China integrated retail group. The REIT was listed on SGX Mainboard on 11 December 2015. The principal investment strategy of the REIT is to invest, directly or indirectly, in a diversified portfolio of income-producing real estate, which is used primarily for retail purposes (wholly or partially), as well as real estate-related assets in relation to the foregoing, with an initial focus on China.

Its portfolio comprises five retail properties - Beijing Wanliu (60%), Chengdu Konggang, Hefei Mengchenglu, Xining Huayuan, Dalian Jinsanjiao - located in Tier 1, Tier 2 and other cities of significant economic potential in China. As at 31 March 2017, the portfolio has a gross floor area of about 264,000 sqm and a committed occupancy of 98.6%. As at 31 December 2016 (latest valuation date), the total appraised value is approximately S$810.7 million.

For its 1st quarter results for the period ended 31 March 2017, click here.

The company website is: www.bhgreit.com.

The ccompany's Stock Facts page is here.