Published February 18, 2009

Should Metro quit retail and become a developer?

By ARTHUR SIM

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RECURRING income from property investments may prove to be Metro Holdings' saving grace.

Metro reported its first quarterly net loss in nine years for its second quarter ended September, but it pulled back into the black for its third quarter ended December, despite retail revenue falling to $43 million - a decrease of 8 per cent on a year-on-year (yoy) basis.

The weak retail performance was mainly attributed to the slowdown of the Singapore economy, as well as declines in domestic consumption, and tourist and business traveller arrivals.

Not surprisingly then, Metro has been increasingly repositioning itself as a China property play.

Property revenue in Q3 was $13.7 million, up about 20 per cent from $11.5 million yoy. This was attributed to higher rental income from its office and retail properties in Shanghai and Beijing.

Given these results, one has to wonder why Metro continues to not only stay in the retail business, but also expand.

In the latest quarter, Metro reported that promotional activities by the retail division's Indonesian associate, which 'operated in a highly competitive environment, assisted in achieving sales growth in Q3 FY2009. However, profitability was affected by higher costs as well as costs of the new department store.'

Later this year, Metro also will be the largest anchor tenant at City Developments' new City Square Mall at Kitchener Road when it begins retail operations with some 56,000 sq ft of space.

While Metro will always be known as one of Singapore's household names, the retail environment has changed dramatically since its humble beginnings in 1957. Today, Singapore's most highly anticipated new mall, ION Orchard, will not even have a department store.

Metro must have felt this shift as early as the early 1990s when it made its first significant foray into property by deciding not to open a store at Ngee Ann City, in which it had a 27 per cent stake.

At the time, it was reported that Metro would reap a rental income of more than $28 million a year instead.

Then in 2003, it entered into an asset securitisation deal which valued its Ngee Ann City stake at $538 million.

Metro operates three department stores in Singapore, after closing its operations in Tampines Mall in 2007. Earlier, in 2003, it closed its Marina Square store.

It does have five stores in Indonesia, as well as standalone stores for mass market British brands such as Monsoon and Accessorize here.

But its property business has grown more significant. Metro currently has stakes in four properties in China. These are Metro City, Shanghai (60 per cent); Metro City, Beijing (50 per cent); GIE Tower, Guangzhou (100 per cent); and Metro Tower, Shanghai (60 per cent).

These account for about 200,000 square metres of net lettable area in China, including Metro Tower Shanghai and GIE Tower Guangzhou.

Also in China, it has properties under development including 1 Financial Street, Metropolis Tower and EC Mall, all in Beijing.

The 1 Financial Street project in Beijing, which is already substantially completed, will commence move-in of tenants in stages towards the end of FY2009.

Metro has reported that the remaining two properties under development, Metropolis Tower and EC Mall, are on track for their scheduled opening in Q2 FY2010. It holds effective interest in both properties of 31.5 per cent.

But property exposure also has its downside. A recent report by DTZ Research notes that office rental growth in Beijing on a yearly basis has continued to post stable increases. However, on a quarterly basis, average rents have remained stagnant due in part to a weakening international tenant base and an impending glut in supply.

The situation in Shanghai and Guangzhou is a little bleaker with rents falling.

Metro has itself said that 'volatile market conditions will continue to adversely affect the fair value of the group's portfolio of quoted equity investments'.

Which probably explains why the group is still keen to retain its foothold in retail.