Published September 15, 2011
Silver lining for retail property
Despite global uncertainties, the overall outlook for the sector remains positive, say PETER SEE-TOH and MICHELLE LAM KA SHUN
THE retail property sector has always been a challenging business segment and more so in the past year, from the slow signs of growth in overall retail rentals. While suburban rents have been strong so far, new challenges are surfacing as a significant amount of new supply in the suburban region will be coming on-stream in the next few years.
Very soon, five new suburban projects, namely 112 Katong, Changi City Point, Junction 10, Rochester Mall and Alexandra Retail Centre, will add another 722,000 square feet in net lettable area. More are in the pipeline, accounting for some 3.3 million sq ft of retail space (including these five new malls).
To better compete in this dynamic landscape, a number of suburban malls such as Causeway Point are already undergoing upgrading works and remaking themselves. The challenge for mall owners is to reinvent themselves by bringing in new retail concepts and retailers to address the complaint of 'uniform' malls.
For the prime Orchard Road shopping space, things are looking fairly positive as rentals are seeing signs of stability and marginal uptrend.
The retail leasing market remained active, supported by stable economic growth, low unemployment rate and healthy consumer spending. Retail sales in June 2011 grew by 10.9 per cent year on year, with retail categories such as watches and jewellery as well as telecommunications apparatus and computers registering strong double-digit growth.
Singapore's tourism industry has been robust and Q1 2011 recorded some 3.12 million visitors and $4.98 billion in tourism receipts. This amounts to 15.7 per cent and 35.7 per cent growth year on year, respectively.
For 2011, Singapore is set to meet its forecast of 12-13 million visitors with tourism receipts of $22-24 billion. If the target is met, it will exceed last year's record. The opening of the two integrated resorts and key events such as the Formula One Grand Prix has contributed to tourism's stellar growth.
The industry will continue to bloom, given the line-up of new tourism developments including the Marine Life Park at Resorts World Sentosa (RWS), the Gardens by the Bay at Marina Bay and the River Safari in Mandai.
The Ministry of Trade and Industry (MTI) recently announced that Singapore's economy is expected to grow by 5 to 6 per cent in 2011. With unemployment in the labour market remaining low at 2 per cent, the retail sector would be strongly supported by healthy employment.
Growth in emerging Asia will remain firm as domestic demand continues to improve. These factors will support growth in the near term. Retail and food and beverage (F&B) sales value are expected to increase due to strong expected tourism numbers and sustained local consumption.
Singapore remains a good strategic platform for many brands' expansion, be it for geographical or tax reasons. With new brand entrants such as Abercrombie & Fitch and retail giant H&M arriving on Singapore's shores, more international brands are expected to seriously consider expanding to Singapore.
On the other hand, more brand owners have been seen taking back distributorships and operating directly as there has been a greater number of store revitalisation and expansion.
Luxury brands look to Singapore to test retail concepts so as to expand into the lucrative and growing Asian market. For instance, the first La Montre Hermès boutique was opened in Singapore to showcase its history and its watch-making expertise. We expect more international brands to enter our market as Singapore becomes more attractive given the high consumer confidence and spending propensity.
With competition from the imminent supply of new suburban malls, and with prime rentals catching up with those at Orchard Road, it may be challenging for suburban rents to continue rising at the same pace. Suburban rental may be flat or marginally higher as it adjusts to the new supply.
With population levels expected to remain about the same and a tightening of immigration numbers, the local consumption pie is getting smaller as newer malls compete for a slice of the local consumer market.
Rising manpower costs due to the low unemployment rate and stricter policies have led to a shortage of quality employees for the service sector, hence impeding retailers and F&B operators' expansion plans.
We also expect to see consolidation by retailers who are likely to trim non-performing units. In light of this, non-prime retail space could see a mild correction. As more fashion retailers are undergoing consolidation and curbing their expansion rate, retail malls now see a greater percentage of F&B operators taking up prime spaces and a greater percentage of malls' total lettable space.
A good example would be Bedok Point with more than 40 per cent of the mall occupied by F&B tenants. Those found on level one even have late operating hours in response to the market's changing demands.
The recent volatility in global stock markets may see some slight curtailment in consumers' discretionary spending. In the US and European countries, market sentiment remains fragile. In addition, the recent downgrade of the US long-term sovereign debt rating has led to financial market volatility and increased uncertainties. Should the situation worsen, Singapore's economic growth could be lower than expected.
The overall retail outlook remains positive even as the market is still adjusting to the large supply that came on-stream in the past two years, with improving occupancy expected. Islandwide rentals are expected to register a moderate increase in 2011.
For H2 2011, prime rental rates in Orchard Road are expected to be fairly flat, while suburban retail rents could increase by 2-3 per cent. The positive outlook was reflected in recent optimistic bids for new retail sites sold at Government Land Sale tenders in locations such as Jurong East, Bedok Central and Punggol Central/Punggol Walk.
Singapore's economy is expected to remain fairly strong in the face of recent market uncertainty and financial turmoil and consumer confidence should remain relatively resilient. While there may be some volatility in the market, it is hoped that this will not significantly dampen consumer sentiments.
Mr See-Toh is managing director of retail services and Ms Lam is senior marketing executive of retail services at Knight Frank.