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SINGAPORE'S retail market has been experiencing a drop in sales values. Tourism arrivals and the ongoing labour shortage against the backdrop of an additional reduction in the foreign dependency ratio effective July 2013 are considered some of the key drivers behind this, along with weaker economic sentiment.
However, the outlook is not all doom and gloom.
One bright spot is mixed-use developments within the Central Business District that are proving to be very popular among retailers. Offering offices, residences, hotels and retail podiums within landmark new developments in prime CBD locations such as South Beach, Tanjong Pagar Centre and Downtown Gallery (part of a mixed-use property) has been extremely popular with retailers, given the enormous current catchment and the forecast catchment growth in line with the "Live, Work, Play" guidelines.
Changing consumer attitudes and preferences are other positive aspects of the retail scene and one that is very popular is the healthy lifestyle theme. Taking the CBD as an example, we have seen a huge influx of gym operators - from large-format mega gyms to more bespoke fitness boutiques. This is being followed by growth in the sports apparel market and healthy food options as people take note of their lifestyle choices.
BACK TO BASICS
For the retail market to bounce back we need to not only look forward, but also look back at the underlying principles of retailing. While the global retail environment is moving at a frantic pace, the adage of "location, location, location" is still salient today. The key in all retail markets is ensuring that the retail offer is suitable for the catchment profile of its location: Are the customers looking for ease- of-convenience retail or the experience of a retail destination and does the tenant mix reflect this?
Given the number of retail malls in Singapore and the difficulties highlighted, retail locations that do not meet these parameters or are secondary in doing so are likely to face further difficulties with increased voids (empty shops) and downward pressure on rentals given the large amount of retail space available and economic headwinds.
During difficult retail cycles, new trends often arise as landlords seek to address occupancy levels and adapt their retail offerings. Over the past few years, we have seen an increase in pop-up stores, where retailers are able to occupy space on short-term agreements. These pop-ups allow existing retailers to experiment and new retailers to test products without the financial commitment that a standard lease requires. Trends like this are beneficial to the marketplace as they create differentiation and attract consumers to retail locations. Voids breed voids so temporary stores are an important option for landlords, and this is something that JLL envisages growing as traditional lease occupancy rates fall in certain locations.
TENANT MIX IS KEY
Ultimately, a key aspect in creating successful retail locations is a strong, differentiated and relevant tenant mix. Singapore has seen numerous new-to-market brands and this trend looks set to continue, with JLL working with many such operators.
Alongside sourcing the correct real estate, one key factor for any new-to- market brand is the rent and lease terms. JLL is seeing a correction in rents in response to market conditions but in some cases lease terms remain prohibitively rigid.
Creating flagship stores requires high capital expenditure, which must be depreciated and as such longer lease terms are required; redevelopment, relocation and performance clauses make this depreciation difficult in some cases and impossible in others. While this is not reflective of the entire marketplace, increased flexibility in lease terms is equally important for short-term temporary leases as it is to attract the world's leading retailers - which is key for a vibrant and differentiated retail market.
With the exception of true convenience locations, malls can no longer just be places to purchase goods. A successful retail tenant mix must also allow social interaction and enrichment to encourage repeat visits, increased dwell time and subsequent increased retail spending.
Flexibility to attract leading international retailers, temporary stores, new start-ups and more social interaction often comes at the expense of immediate rental values. For such exercises, a long-term view is required as the upfront cost of repositioning/amending the tenant mix must be balanced against sustaining a long-term income and the overall increased appeal of retail locations.
Tourism arrivals and economic conditions are undoubtedly affecting retailers' sales but from a real estate perspective, retailers and their business models are also adapting to changing consumer behaviour and market sentiment.
One outcome of ever-changing technology is that many retailers are reducing their footprint as a result of e-commerce. Historically, increasing the number of stores was one of the key weapons of a retailer in raising market share by presenting its brand to consumers in numerous locations. A strong online presence now allows retailers to ensure that their brand is never out of consumers' minds and consumers can research, browse and purchase on the go, which ultimately means certain retailers require fewer stores than before.
Physical stores do continue, however, to play a very important role in brand building, service, loyalty and, of course, point of sale, but their nature is adapting. JLL is seeing an increase in "brand pavilions/flagship stores" that are used by retailers to showcase the very best of the brand and are located in the prime retail locations. These stores are used alongside an online presence to build brand positioning and awareness and they allow customers to feel and try products. In many cases, the newest technology - think virtual fitting, 3D printing, etc - is utilised to maximise consumer experiences. As a result, JLL foresees demand for prime retail space growing to meet these requirements, although this is complicated by the small size of the Singapore prime market.
To summarise, the Singapore market has been experiencing difficult times with a drop in sales volumes and the impact upon real estate is being exaggerated by the frenetic pace of change in retail itself. The most successful landlords and retailers will be those able to embrace these changes and JLL expects to see some exciting changes in the future. We do, however, foresee further downward pressure on rentals and an increase in vacancy levels in certain locations as retailers downsize their store numbers.