Monday, January 2, 2012

Less sanguine rental outlook for malls

Business Times: Mon, Jan 02
(Singapore)
RENTS at Singapore's malls, which have ridden on the nation's success as a world-class shopping and event destination for most of the year, are expected to remain stable at best in 2012. Over the past two years, retail malls have enjoyed an uplift in rental rates on the back of robust economic growth which drove domestic consumption and tourist expenditures skywards. Certain areas still continue to show healthy rental gains amid the increasingly cautious market.


According to CBRE, suburban rents have continued to climb in the third quarter of this year, growing by 2.9 per cent quarter on quarter to $29.75 per square foot (psf) per month.


However, the situation seems less rosy along the prime retail stretch. Average rents at prime Orchard Road units remained unchanged (on a quarterly basis) at $31.60 psf per month in the last quarter of the year, reflecting retailers' waning sentiment.


Letty Lee, director of Retail Services at CBRE, said: 'The prevailing mood is expected to continue in Q1 2012 as retailers are expected to adopt a wait-and-see attitude. Rents are expected to remain stable in the first three months of 2012 but may see some downward pressure later in the year.'


Supporting this view are three consultants, who add that more cautious spending can be expected next year, resulting in weaker retail earnings which will in turn slow down rental growth. The consensus view is that an economic slowdown will take place in 2012, though businesses involved in the 'basics and necessities' are likely to weather the headwinds better than those in the luxury sector.


Credo Real Estate executive director Ong Teck Hui noted: 'A mild slowdown in 2012 could result in retail rents moderating by 10 per cent on average with prime spaces and popular malls doing better.'


Notably, Mr Ong expects rents in 'popular' suburban malls with 'high occupancy rates' to hold steady.


Comparing the rental resilience of suburban and prime retail properties during past prolonged recessionary periods, DBS Group Research analyst Lock Mun Yee said: 'While the prime Orchard area enjoys higher rental upside due to the 'tourist spending' effect during economic recoveries, the segment also suffered larger declines of 33 per cent during the Asian financial crisis and 17 per cent during the 2009 global financial crisis. In comparison, suburban rents fell 20 per cent and a mere 3 per cent for the same period respectively, thanks to a ready catchment of residents in the area, steady demand for basic goods and less competition from new malls.'


Supply-wise, another 756,000 sq ft of new retail space is expected to flush the retail universe next year, with the majority (38 per cent) stemming from suburban malls, according to Colliers International's estimates.


Highlighting her concerns on the supply situation island-wide, Colliers director of Research and Advisory Chia Siew Chuin commented: 'The retail property market barely had time to acclimatise to the large supply that came on stream in the last two years, as more new malls continue to be completed and add to the competition for tenants.'


In particular, Ms Chia pointed out that while rents of prime ground floor space in good quality malls in the regional centres tend to be more resilient, the large pipeline of space entering the suburban areas together with tenants' growing resistance against upward adjustments in rents, are likely to cap rental growth.


Investment activity has also started to ease off in the second half of 2011, marked by a 33.3 per cent decline in transactions and a 21.6 per cent slide in total transaction value, highlighting a growing disparity between sellers' and buyers' expectations, reported Jones Lang LaSalle.


Not surprisingly, this has resulted in a less sanguine outlook for capital values with most consultants expecting 'little to no change' for prime ground floor retail spaces along Orchard Road and the sub-urban areas as rents undergo a 'stabilisation phase' amid mounting caution and burgeoning supply.


Source: Business Times © Singapore Press Holdings Ltd.

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Martin Koh/ Sherry Tang
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