Scaling new retailing heights

 

 November 5, 2010

The year 2010 has been bittersweet for the Singapore retail property market. With the economic rebound, the slide in prime retail rentals has long since come to an end but the recovery of such rentals has so far been muted.

As Singapore’s recovery takes hold, one wonders if our retail sector will benefit. The prospects for the sector will be underpinned by several key long-term visions from stakeholders, which are critical to supporting sustainable growth.

So far, malls have been actively responding to shoppers’ needs for a refreshing shopping experience by continually re-conceptualising offerings. A number of innovative retailers have since been attracted to the Republic as well. The next lap for the retail property market will, therefore, hinge on the precision in development timing and the sustainability of retailers.

Development timing is crucial

It was about five years ago when plans to rejuvenate the tired-looking Orchard Road were announced and rapidly implemented with the launch of three strategic sites – then known as Orchard Turn, Orchard Road/Killiney Road and Somerset Central.

However, when the three major malls were completed last year, consumers were holding on tightly to their purse strings amid the throes of a global recession. Although the new malls achieved almost full occupancy and impressive rentals, the heightened competition raised overall vacancy in Orchard Road from 3.3 per cent in 2008 to 6.3 per cent in 3Q10. Consequently, prime retail rents in Orchard Road fell 7 per cent last year and 5 per cent this year, year-to-date.

Perhaps it is more appropriate to view this new supply as untimely rather than excessive, for the decade-old dearth of new shopping choices in Orchard Road was ultimately addressed, only that the new offerings arrived during the economic recession.

It was a case where prevailing optimism during an economic boom supported seemingly promising development concepts. For retail space to work, the exciting offerings have to be showcased during the surest economic times – where shoppers can splurge and retailers can, therefore, anchor their interests.

Plans to re-spruce ageing malls and enliven shopping streets should be made during subdued economic times, where overall costs are lower and completed in time for the economic recovery.

It is a courageous call for mall owners to proceed with contrarian development plans during lacklustre economic times but the brave can potentially be rewarded richly for their strategic vision.

Rental Competitiveness and Lease Sustainability

As leases are contractual, tenants who encounter business hardship have limited options except to appeal to their landlords. A lack of understanding on the part of the landlords may lead to some tenants openly demonstrating their frustrations, especially if the mall operators do little to enhance human traffic.

To minimise such friction, landlords can critically evaluate the viability of retailers who express interest to lease the space, particularly for enthusiastic new entrants who are not familiar with the vicissitudes of operating a retailing business.

Being seasoned retail players, landlords who have sufficient resources can consider screening prospective tenants by engaging business consultants to examine prospective tenants’ business plans and welcome only retailers who have cost-efficient and sustainable strategies, on top of new retail offerings. New concepts must be differentiated with those which will work – the latter will mean retailers whose concepts are both innovative and economically viable.

Such a critical analysis will allow landlords to move from curative to preventive measures, which will eventually reflect the success of the mall.

By now, economic fluctuations have enabled every mall owner to recognise that record rentals are easily achievable in any optimistic retailing market condition.

The next challenge is to ensure lease sustainability, with tenants comfortable with operating in the mall. On an encouraging note, we can see that landlords are increasingly adopting a strategic view.

Such landlords go beyond mere tenant placements – they believe in tenants who will shine in the longer run, even though some may initially require assistance, like rental concessions and fit-out assistance.

Many successful retailers have humble beginnings, growing exponentially from a least-frills low-cost business by offering innovative concepts.

Shoppers’ Empathy and Magnanimity

The truth is, one size hardly fits all and no single mall can cater to the likes of everyone. Although there are successful malls that are perennial favourites, there will be some that go undiscovered. Depending on the purpose and preference of the shopper, these places can provide surprises.

For instance, successful malls are usually crowded – hence quieter malls may offer comfortable corners for shoppers to better connect with companions, especially when the gathering is occasional. Some shoppers may be discontented with selected shops in a mall but it will be possible to patronise other retailers who may be able to meet our expectations.

Perhaps, we shoppers can put ourselves in the position of retailers who are undertaking challenging commitments, underpinned by creativity and prolonged passion.

The entrepreneurship is ultimately beneficial for Singapore’s long term economic and societal growth. A mall which may not have met our initial expectations can be given a second chance, particularly if it has undergone some enhancements. There are also some malls with alternative and abstract concepts which may not be easily noticed but shoppers who appreciate these may find a lasting affinity.

Beyond Conventional Property Dimensions

The retail property sector goes beyond the traditional supply and demand fundamentals. The sector has an additional and essential dimension, where each retail space is highly specific, differentiated by the retailer’s offering. If the right content is provided and is consistently ensured, the success quotient of the mall could be high.

Most mall owners are already successful in attracting innovative retailers and many recognise their role in facilitating these tenants by providing a reasonable leasing platform to enhance lease sustainability.

A competitive lower occupancy-cost can also attract retailers with creative offerings, who see it as a timely opportunity to enter the market or expand.

As shoppers, we can have a sense of adventure to help us discover interesting corners in malls, which are after all key places in tropical Singapore to hang out.

By Ong Kah Seng, Senior Manager, Research (Asia-Pacific) at Cushman & Wakefield.