Property investments’ recurring income may prove to be the saving grave of Metro Holdings.
The first quarterly net loss of Metro for nine years was recorded in Q2, but it regained its loss in Q3, despite the plunge of retail revenue to $43 million – an eight percent decrease on a year-on-year basis.
The poor performance in retail was mainly due to the economic slowdown in Singapore, as well as the weak domestic consumption, and business and tourist traveller arrivals.
Unsurprisingly, Metro has been repositioning itself as property play of China.
The Q3 property revenue was $13.7 million, a 20 percent increase from $11.5 million year-on-year basis. This was brought by higher income in rentals from retail and office properties in Beijing and Shanghai.
With these results, people may wonder why Metro has expanded, despite staying in the retail business.
In the recent quarter, Metro reported its promotional activities from its Indonesian associate in the retail division, 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.”
Metro will also be this year’s biggest anchor tenant at the new City Square Mall of City Developments located at Kitchener Road, when its retail operations begin with about 56,000 square feet of space.
While Metro Holdings will always be a famous household name in Singapore, the retail sector has dramatically changed since it began in 1957. These days, the most anticipated mall in the city, ION Orchard, will not be having a department store.
This shift could have been felt by Metro as early as the 1990s, during its first foray in the property sector by not opening a branch in Ngee Ann City, where it had a 27 percent stake. At that time, $28 million plus per year of rental income would have been achieved by Metro.
In 2003, an asset securitisation deal was entered by Metro to value its stake at Ngee Ann City at $538 million.
Three department stores are operated by Metro in Singapore, after its Tampines Mall operations closed in 2007. Its store at Marina Square was closed earlier in 2003.
Metro does operate five stores in Indonesia, and standalone stores with British brands like Accessorize and Monsoon.
However, Metro’s property business has become significant. Currently, Metro has stakes in four properties located in China. These include Metro City, Beijing (50 percent); Metro City, Shanghai (60 percent); Metro Tower, Shanghai (60 percent); and GIE Tower, Guangzhou (100 percent).
These cover a net lettable area in China of approximately 200,000 square metres, including GIE Tower Guangzhou and Metro Tower Shanghai.
Metro has ongoing property development in China, including EC Mall, Metropolis Tower, and 1 Financial Street.
It was reported that the development of EC Mall and Metropolis Tower are right on schedule and are set to open in Q2 of 2010. It holds 31.5 percent of effective interest for both properties.
However, property exposure has a bad effect. A DTZ Research report notes that growth in office rentals in Beijing has continued to increase on a year-on-year basis. But, on a quarterly basis, the average rents remained stagnant partly because of the international tenant base weakening and the supply’s impending glut.
The situation in Guangzhou and Shanghai is slightly bleaker with decreasing rents.
Metro itself said “volatile market conditions will continue to adversely affect the fair value of the group’s portfolio of quoted equity investments”.
This probably explains the group’s focus in retail business.