CONSOLIDATION and the closure of more department stores in several malls could lead to softer average retail rents and higher vacancy rates, according to a report by property consultancy firm Knight Frank.
A softer average retail rent, and higher store vacancy rates can be expected for the second half of 2015, along with an increment in the supply of retail space in major malls over the next four years.
Amid the current challenging retail landscape, and as major retailers continue to consolidate their operations in the market, mall owners will turn to issuing short-term leases to generate revenue while continuing to search for long-term tenants, the report added.
The retail climate is expected to see an influx of new retail space. Be it from new major projects or a rise in larger vacant units subsequent to the closure of several department stores island-wide, the promise of a surge in the supply of new retail space in 2015 has put pressure on prime retail rents island-wide by roughly 1 to 2 per cent this year, and average rents across Singapore may also fall by 3 to 5 per cent in 2015, Knight Frank said.
And as new major malls enter the retail pool, the report expects approximately 3.7 million sq ft of net lettable retail space to come onboard from 2015 to 2019, which averages some 0.7 million sq ft of new major retail space per year. The report noted that 1.1 million sq ft of net lettable retail space will be completed in 2018, of which roughly 75 per cent, or 0.8 million sq ft, is located in Outside Central Region of Singapore.
The year saw a wave of department store closures inducing larger vacant units in many malls. For example, Wisma Atria closed its Isetan store in 2015's second quarter after 30 years, and John Little closed its Marina Square branch with further plans to close its Tiong Bahru store this year. Marks & Spencer closed its Centrepoint store in March, and Metro will close its Compass Point outlet by the third quarter of 2015, after running for 12 years.
According to Knight Frank, anchor retailers such as department stores play an important role in a mall by not only serving as "magnets" to various sections of the mall but also acting as "a good test bed for brands looking to enter the market".
Heidi Yong, head of retail for Knight Frank, said that department stores continue to remain relevant in the retail market, and "serve as one of the key forms of anchor tenants, which help a mall provide a comprehensive trade mix, and serve as magnets to draw crowds to different parts of a mall".
Retail rents for prime areas across Singapore also rose in the second quarter to S$32.20 per sq ft - a 0.8 per cent increase from the first quarter of the year. The report attributed the growth to "continued firm demand from retailers for the best spaces of popular malls due to limited supply", with an added impact from retail trade re-positioning and renewals, and spaces developing through Asset Enhancement Initiatives (AEIs).
After undergoing AEIs, Marina Centre, City Hall and Bugis precinct saw prime retail rents rise 1.1 per cent to S$33.00 per sq ft from the previous quarter, while prime retail rents in the city fringe and suburban areas increased by 2.2 per cent to S$23.50 per sq ft and 2.8 per cent to S$33.10 per sq ft from the first quarter respectively. Orchard Road (central) prime retail rents fell 1 per cent from the first quarter to S$47.40 per sq ft while Orchard Road (fringe) showed no change in rents in the second quarter.
Singapore's retail scene also introduced a number of "new-to-market brands" in the first half of 2015 as "as landlords scurry to refresh their tenant mixes", the report added. Capitol Piazza featured a range of new luxury retailers and dining options, while Scotts Square, VivoCity, and Suntec City Mall also made changes to their tenant mix this year.
Taken from Knight Frank's report, an earlier version of this article stated that Marks & Spencer has plans to close its Centerpoint store and Metro will close its Compass Point outlet by the second quarter of 2016. In fact, Marks & Spencer closed their outlet in March, and Metro's Compass Point outlet will close in the third quarter of 2015, which is the second quarter of the 2016 financial year. The article above has been revised to reflect this.