Relief measures for retail sector do not address structural issues

RELIEF measures for retailers from the government and landlords are very thoughtful, but do not address the structural issues of e-commerce, high occupancy costs and manpower shortage that continue to plague the retail sector.

Deputy Prime Minister Heng Swee Keat at this year's Budget announced a 15 per cent property tax rebate for commercial properties. Landlords also declared that they would pass on the savings to tenants in full, with some even going further in releasing security deposits to offset tenants' rental payments.

All these will go towards helping retailers tide over the difficult period - but the relief will only be temporary.

CapitaLand on Wednesday said that its customers are returning to its malls, with foot traffic in the suburban malls almost back to normal, although still about 5 per cent below pre-Covid-19 levels. This is a vast improvement from when foot traffic plunged 50 per cent after Singapore on Feb 7 raised the Disease Outbreak Response System Condition (Dorscon) level from yellow to orange.

But that is for suburban malls. The situation at Orchard Road is quite different. Malls there are more dependent on tourist spending, and continue to face slow footfall and sales. For instance, Starhill Global Reit - which owns stakes in Ngee Ann City and Wisma Atria - says that sales are about 30-40 per cent below pre-Covid-19 levels.

Little wonder, given that the Singapore Tourism Board (STB) has said that Singapore could see a 25-30 per cent decline in tourist arrivals and spending this year because of the outbreak. The city-state is losing about 18,000- 20,000 tourists a day, and there is anecdotal evidence of businesses experiencing a drought in cash flow, given the travel bans on Chinese visitors which make up about a fifth of Singapore's tourism intake.

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Food and beverage (F&B) outlets are also struggling. F&B depends heavily on footfall, and can make up to about two-fifths of net lettable area in some malls.

On the stock market, retail real estate investment trusts (Reits) are still trading underwater month-to-date, except for suburban mall owner Frasers Centrepoint Trust. Mapletree Commercial Trust has fallen about 5 per cent since the start of February, while Starhill Global Reit and CapitaLand Mall Trust have fallen about 4 per cent.

RHB in a Feb 19 report said that the outlook remained "uncertain" for retailers and F&B operators in spite of the relief measures announced by the government, due to "elevated" uncertainties from the Covid-19 outbreak and softening economic growth.

"We expect domestic spending to decline in 2020 . . . Food service, retail and integrated resorts businesses are likely to be adversely impacted in the first half of 2020. Recovery in the second half would depend on how quickly the Covid-19 situation resolves." The brokerage is especially pessimistic on Reits that own malls in prime tourist locations. It has a neutral rating on the sector.

CGS-CIMB analyst Lock Mun Yee said that retail landlords are in effect using a two-pronged approach of offering marketing assistance to help drive tenant sales, as well as in some cases, offering cash flow relief through flexible rental payment, rental rebates of up to half a month as well as releasing a month's worth of security deposit to offset rental payment.

"We think it is also key to help retailers improve their sales rather than a case of prolonged rental relief. Whether the announced reliefs are sufficient would also depend on how long it takes for conditions to improve. We think . . . these softer operating conditions would likely hamper rental growth outlook."

Unlikely to cut rent

Christine Li, head of research for Singapore and South-east Asia for Cushman & Wakefield, also believes that landlords are unlikely to cut retail rents at this juncture.

"This because both landlords and tenants suffer during a crisis like this, and cutting rents will not solve the immediate problem which is the drastic decline in footfall. Landlords will get rent arrears (late or non-payment of rents) if they don't do anything, but if they immediately cut the rents, their own balance sheet will be hit immediately, so it is not in their interest.

"Hence they would rather take out a sum of money to step up its advertising and promotional efforts, such as by giving vouchers to customers to encourage them to spend. Cutting rents is the last resort."

That said, Knight Frank head of research Lee Nai Jia thinks that the Covid-19 outbreak could accelerate a structural shift in the retail and even F&B sectors. More consumers are likely to switch over to online platforms for their purchases, he said. The F&B business model may also need a relook, as more consumers make food delivery orders online.

"This also means that we are likely to witness a structural change in the retail business model. Should businesses undergo a structural change during this Covid-19 period, tenants that continue to rely on traditional forms of marketing and business models will be left further behind and will face greater financial pressure."