Monday, January 10, 2011

New supply to cap suburban mall rentals

(SINGAPORE) Rents at Singapore's suburban malls - which shot up in 2009 and 2010 and narrowed the gap with Orchard Road rents to a historic low of 3.6 per cent - are expected to grow at a slower pace over the next few years as major new supply comes onstream.

In fact, around one million square feet of new suburban retail space was added in 2010 and another 800,000-plus sq ft will be added this year, data compiled by BT shows. This will account for more than 60 per cent of all retail space to be added islandwide.

This is expected to depress rental growth at the neighbourhood malls which has climbed in the past few years on the back of higher shopper traffic.

Prime suburban rents are now a mere 3.6 per cent lower than prime Orchard Road rents, according to CB Richard Ellis (CBRE).

In Q1 2010, the difference was a much greater 12.6 per cent. The gap continued to narrow over 2010 as prime Orchard Road rents fell 6.6 per cent as the market adjusted to new supply.

On the other hand, prime suburban rents rose to $29.10 psf a month in 2010, reflecting a rental increase of 2.8 per cent for the whole year.

Noted CBRE director for retail services Letty Lee: 'This is the only segment of the retail sector that showed a rental gain, proving the resilience of suburban areas, which are underpinned by catchment demand.'

Still, the rate of rental growth for suburban retail space is expected to slow down as new supply is added in 2010, 2011 and 2012.

The bulk of the one million sq ft of suburban retail space last year came from the much-awaited nex at Serangoon Central - 600,000 sq ft - which opened in the final quarter of 2010.

In 2011, supply is expected to come mainly from the suburban markets. Notable projects include Clementi Mall (with around 190,000 sq ft of retail space); CapitaLand's JCube (the former Jurong Entertainment Centre, which will offer 204,000 sq ft of lettable area either in late 2011 or Q1 2012); and Frasers Centrepoint's Changi City Point (207,000 sq ft of retail space).

In addition, resistance from tenants could set in, analysts said. On the back of this, prime suburban rents are likely to see only a slight upside - around 2 to 3 per cent - in 2011.

CBRE said that prime suburban rents are likely to see a maximum 3 per cent upside in 2011.

'Suburban prime rentals should see a year-on-year increase of some 2 to 3 per cent - in line with the expected increase in income,' said Png Poh Soon, head of research and consultancy at Knight Frank.

By contrast, after the opening of five major malls in 2009 and 2010 in the Orchard Road and Scotts Road areas, there will be little new supply coming onstream in 2011 and 2012 along the premier shopping street, noted DTZ associate director for retail Anna Lee. This should give rents a boost as demand catches up with supply, and also widen the gap between Orchard Road and suburban rents once again.

Most analysts expect to see prime Orchard Road rents grow by around 5 per cent in 2011. But some are even more bullish. Savills Singapore, for example, predicts that prime Orchard Road rents could climb as much as 10 per cent in 2011.

Ong Kah Seng, Cushman & Wakefield's senior manager for research, said that the recovery in prime Orchard Road rents will be more apparent in the second half of 2011 as the global economy strengthens.

Still, despite slowing rental growth, suburban retail assets are seen as highly desirable due to their resilience even in times of recession.

Retail development sites were highly contested, with 6-14 bids received at each of the three government land tenders this year. Bidders were also extremely bullish. For example, CapitaLand and its retail spin-off CapitaMalls Asia bid $841 psf per plot ratio for a retail site in September 2010 - some 40 per cent higher than market expectations.

In addition, demand for suburban retail space from tenants continues to be robust in spite of the unveiling of major malls such as nex, noted DTZ's Ms Lee. She said that 'with rising employment and wage increases, suburban malls continue to benefit from their immediate catchment of residents'.

'Generally, confidence is in the market with some retailers still looking for space for expansion,' said Lee Siew Ling, associate director for retail at Jones Lang LaSalle. 'In addition, there are also new entrants looking for opportunities in the Singapore retail market.'

And unlike in the past, new entrants could choose to set up in suburban malls instead of along Orchard Road, analysts said. For example, Malaysia-based furnishing retailer King and King Wong picked nex at Serangoon Central to make its maiden foray into Singapore.

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