Retail rents in Singapore have demonstrated a remarkable period of stability post-Global Financial Crisis (GFC), with average rents in both prime (Orchard) and suburban locations holding steady for nearly four years..

However, since their peak in early 2015, average retail rents have fallen by about 7.5 per cent for both prime and suburban ground floor, by 11.5 per cent for prime upper floors and by 10.5 per cent for suburban upper floors.

While a soft economic environment and a negative “wealth effect” are cyclical factors that have contributed to this current retail rental downcycle, the magnitude of the cycle-to-date decline is comparable to that seen during the GFC.

Given expectations that retail rents have yet to bottom, the current retail downcycle is driven by both cyclical as well as structural elements.

Structurally at the retailer level, a deliberately lower pace of population growth has not only driven up wage costs but also reduced the average top line, given that population growth has increased at a slower clip vis-à-vis retail stock.

With overall occupancy costs remaining largely within the 16-20 per cent range depending on location, this has meant increased pressure on retailers’ margins, thereby leading to greater pushback on the part of retail tenants against rental increases, as well as continued pressure to consolidate their retail footprint or revamp their operations where possible, in order to boost productivity, such as sales per employee per hour. Another structural shift, which is the continued growth in e-commerce and omnichannel retailing, has changed the DNA of the typical mall.

Bookstores and music/DVD shops have become rarities now, and fast fashion is facing increasing pressure given revenue leakage to non-mall retailing channels as well as the cost pressures mentioned in the previous paragraph, which have combined to drive up occupancy costs to unsustainable levels for some fast fashion tenants.

To mitigate this, landlords have increasingly sought to rejig their retail mix in order to bring in a higher percentage of services-oriented trade sectors, at the expense of trade sectors that have increasingly gone the omni-channel retailing route.

The implication of this shift is that retail rents for certain services-oriented trades, like food and beverage, cinema and entertainment, and education are often lower than what can be obtained from leases to fast fashion and other speciality retailer tenants.

This could have had the effect of driving down average retail rents for malls as well.

Overall retail rents in Singapore are expected to decline by around 5 per cent in 2016 and another 2 per cent in 2017, as the retail landscape gets re-based to reflect the new consumer reality.

That said, these reflect expectations for the overall universe – the retail real estate investment trust (Reit) landlords, by virtue of more focused and aggressive asset management, which manifests in continued asset enhancement initiatives and efforts to draw shopper traffic and entrench shopper loyalty, are likely to achieve above-market results for their respective portfolios.

A further tiering of the market can be seen, less so between prime Orchard and suburban malls, but a tiering that is premised on scale, location and connectivity, and active asset management.

On the supply side of things, the retail sector saw the peaking of new supply in 2014. Looking ahead into the 2016-2018 period, new retail supply averages 1.3 million sq ft net lettable area (NLA) per year, with the two biggest retail schemes – Project Jewel (576,000 sq ft NLA) at Changi Airport, and Paya Lebar Quarter (340,000 sq ft NLA) at Paya Lebar – completing in 2018.

Otherwise, no new retail scheme exceeding 200,000 sq ft NLA (which is reflective of a fairly decent scale for a mall) is expected to be completed this year or next.

That said, net new demand for retail space has been well below the pace of net new supply over the past two years and was net negative in 2015, leading to a relatively sharp increase in the retail vacancy rate to 8.1 per cent.

In H1 2016, though net demand trended back to positive, this accounted for just under half of the net supply completed in H1 2016, leading to a further rise in the vacancy rate to 8.9 per cent.

Given the soft economic environment in Singapore, coupled with the overall decline in retail sales, net demand is expected to remain soft for this and next year.

Hence, net demand is unlikely to fully absorb net new supply. Given this, a further increase in vacancy rates for the private sector retail space is expected, potentially hitting 10 per cent by end-2017.

Adapted from: The Business Times, 12 December 2016

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