Tuesday, January 29, 2013

Rentals in suburban malls expected to dip

Prime retail space in the Orchard area expected to see stable yields

The Business Times
January 29, 2013

[SINGAPORE] With the bulk of retail space due to come onto the market located in the suburbs, expect to see slight downward pressure on rents for space in some of these areas.

Prime retail space in the Orchard area, however, is expected to see stable yields due to a more limited supply coming onstream, although some uncertainty over how the area will perform exists, given the global economic climate.

This is the general prognosis experts have of the retail property sector in Singapore.

They also expect investors to show higher interest in strata retail space given the latest cooling measures that hit the residential and industrial property sectors, but note that the bulk of retail space available are owned by single landlords.

Said Alice Tan, senior manager of research & consultancy at Knight Frank: "For prime retail spaces in the Orchard area, yields are expected to remain stable, given the steadily increasing rental levels vis-a-vis higher expected prices.

"Shops in suburban regions where a significant amount of supply is coming in will see some downward pressure on rentals. Beyond these areas in the suburban region, we do not expect rentals to fluctuate much and are likely to move in tandem with economic and income growth."

Consultants say that an estimated 1.9 million square feet of retail space is set to come onstream this year. The majority of this space is held under a single ownership structure by a commercial developer or reit (real estate investment trust) and is for rental income. As much as 80 per cent of this space is expected to be located in the suburbs.

Orchard Road

Letty Lee, director of retail services at CBRE, noted that 2013 is the only year with proposed completion of retail projects along Orchard Road up till 2016. This could help rents to stay stable.

The space has also been well-received. Three projects are expected to be completed in 2013 and they include the AEIs (asset enhancement initiatives) of The Heeren, Orchard Gateway and the redevelopment of 268 Orchard Road.

It was reported that The Heeren will be fully occupied by department store Robinsons, and that Orchard Gateway is already more than half pre-committed, with tenants like Crate & Barrel, Religion, Swatch Megastore and Nike's new concept store called Amplify Women's. The library@orchard will also be situated at Orchard Gateway.

Knight Frank Singapore's director & head of retail agency Heidi Yong noted that in total, the three projects are likely to result in a 5 per cent increase in retail space along Orchard Road, less hefty than the 15 per cent increase in retail space seen in 2009, which saw the addition of malls like Orchard Ion, Orchard Central and 313@Somerset.

But there are other factors that impact rents of retail space, such as foot traffic and retailers' ability to generate sales.

And while retail sales this year are generally expected to be augmented by fairly healthy tourist arrivals on the back of new and reinvented visitor attractions in Singapore, there are risks surfacing for the Orchard shopping belt.

Said Chia Siew Chuin, director of research & advisory at Colliers International: "While Orchard Road still caters to the tourist crowd, there is less impetus for Singaporeans living in the heartlands to commute to town, unless it is to shop for a unique product or service or for a special occasion."

Knight Frank's Ms Yong believes that the state of the global economy will inject some uncertainty to tourism arrivals to Singapore.

She said: "The current state of the global economy brings uncertainty to visitor arrivals and expenditure trends for the Singapore tourism industry."

"Further, the local population is also observed to have turned cautious in their spending patterns, and more consumers are turning to cheaper online sources for their shopping needs. Retailers are also more measured in their expansionary plans as they brace themselves for potentially tougher times in the year ahead," added Ms Yong.

Jurong Gateway

Much of new shop space that will come onto the market this year will be located in the Jurong Gateway area, which will see two new malls spring up. Jem, by Lend Lease, has an estimated shop gross floor area (GFA) of 573,000 square feet. Westgate, a retail cum office development by CapitaLand, will offer an estimated shop GFA of 426,000 sq ft.

The malls are reportedly over 80 and 50 per cent leased, respectively, ahead of their expected opening.

Said Ms Yong: "Many keep watch on the retail scene in the Jurong Gateway... With their strong tenants comparable to Orchard Road malls, they are well-positioned to attract well-established retailers."

The new malls may lead tenants of existing malls in the west to take flight from their current place of residence, added Ms Yong, who noted that rentals at Jurong Gateway "will be positioned competitively to attract tenants".

"Hence, we might see higher vacancy rates on average for retail malls in the west, taking into account the initially higher vacancy expected in the upcoming malls and possible flight to quality from existing malls.

"This may add pressure on rentals of older malls, which may need some quarters to stabilise."

Over the longer term, however, these existing malls that are differentiated from the typical mass market malls, such as JCube - which positions itself as an entertainment mall - and IMM - an outlet mall - could help them to retain their niche audience, observed Ms Yong.

Generally, suburban malls are benefiting from the successful decentralisation of Singapore, said CBRE's Ms Lee.

"Suburban malls are generally able to widen their tenant base as the size and spending power of residential catchments increase. Suburban malls no longer cater purely to retailing low-end daily necessities but have evidently attracted new international retailers. Coupled with strength of management from Reit/funds landlords, prime suburban rents are expected to remain steadfast with an optimistic horizon."

Strata retail

Strata-titled retail space is expected to see heightened interest among investors this year, as a result of the cooling measures introduced by the government to the residential and industrial property markets.

Said Chua Yang Liang, head of research in Singapore & South-east Asia at Jones Lang LaSalle (JLL): "Investors flush with liquidity are likely to support prices of commercial properties, especially in light of the freshly implemented cooling measures which will filter out some investment dollars from the residential and strata industrial markets.

"This has already been witnessed over the past few rounds of cooling measures, which has seen increased new sale activity over the period of 2010-2012, encompassing launches of strata retail units at Bugis Cube, Promenade@Pelikat and East Village among others."

Knight Frank's Ms Tan believes that strata-titled shop spaces could see higher interest translating into price increases of between 5 and 10 per cent this year.

Some new strata retail space is expected to come onto the market, but they do not make up a significant proportion.

Of the 1.9 million sq ft of retail space due to come on stream this year, just 46,630 sq ft, or about 2 per cent, is strata space, said JLL.

To investors who are unfamiliar with the retail property market but want to dip into it, JLL's Mr Chua said: "You need to do your sums right. Don't overleverage."

Investors also need to understand the product and consider factors such as the location of the space.

"Is the unit in a good location within the mall and is the mall in a good location? What market does it serve? Does it have a strong concentration of commercial (office/retail activity)?" said Mr Chua.

He added that an added dimension that investors should take note of when it comes to retail property is the maintenance and image of the overall mall.

"Does it have the quality and reputation for generating/securing foot fall to support the tenant and consequently, the rental payments to you?

"Strata retail developments are typically prone to management issues due to this fragmented ownership. Can the management have consensus over the branding and marketing of the mall in future?"

The long term

But while take-up rates at malls, both suburban malls and those located in the Orchard area, appear to be holding up, there exists some longer term challenges that could potentially hit the market.

Colliers' Ms Chia noted: "Discretionary spending by local residents may continue to slide given the uncertain and bearish economic outlook.

"The prevailing problems of manpower shortages and the increasing resistance against further rental increases from tenants will all have a bearing on demand, and consequently retail rents."

Knight Frank's Ms Yong said that retailers are actually "very cautious and prefer to take their time before making decisions".

"They choose where they want to expand and most will not commit until it's closer to TOP, as one of the concerns is whether they can find staff.

Some malls are expected to be able to weather these challenges better than others.

Said Ms Yong:"New malls that are well-positioned with good accessibility and high foot falls are better considered.

"Existing malls that are successful - tried and tested - have a good following, are more likely to have a long list of retailers who are 'waitlisted' to get in. But such strong demand may not be the same across all malls."

Martin Koh | 86666 944 | R020968Z
Sherry Tang | 9844 4400 | R020241C
Senior Sales Director
Email: marshe_inc@yahoo.com.sg
DTZ Debenham Tie Leung (SEA) Pte Ltd (L3006301G)

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