Retail rents up but not much cheer for landlords

HAVE Singapore retail rents finally bottomed? That is a question some people have been asking after the Urban Redevelopment Authority recently released data showing a 2.9 per cent rise in the retail rental index for the Central Region in 2019 - reversing the 1 per cent fall in 2018.

Last year's retail rental gain was most pronounced in the prime Orchard Road shopping belt. The URA's median rental (based on lease commencement) for the Orchard Planning Area climbed 5.9 per cent last year, outperforming increases of 2.7 per cent for Central Area outside Orchard, and 0.9 per cent for Outside the Central Area (OCA).

Market watchers told BT that landlords of some prime Orchard Road malls achieved positive rental reversion for choice spaces - signing up new tenants for vacated space or renewing leases for existing tenants, at higher rental rates in 2019. However, demand for retail space in secondary locations and corridors remains lacklustre.

Why have rents in the Orchard area fared better?

First, a quick wrap on the state of the Singapore retail market. On the whole, brick-and-mortar stores continue to struggle under the weight of competition from online retailers and e-commerce, labour shortage, tight cash flow and yes, what to them are still high rents.

Among the hardest hit retailers are those in mass-market fashion goods comprising apparel, handbags, shoes and accessories.

However, as a veteran retail property consultant told BT, retailers of high-end fashion brands in Singapore have been less affected by e-commerce because they continue to enjoy the patronage of customers at their stores, including visitors from the region, who are wary of being supplied with fake merchandise online.

Singapore enjoys a good reputation for offering genuine branded goods and there's a certain feel-good experience of leaving a branded boutique with carrier bags bearing an upmarket label's name.

Orchard Road is among the very few established locations in Singapore for high-end branded boutiques; another would be Marina Bay Sands (MBS). Hence, the noteworthy strengthening in retail rents in the Orchard area last year as seen in URA's data.

The challenges facing the overall Singapore retail industry have led to a change in the tenant mix of malls over the years.

It used to be that fashion retailers were the mainstay of Singapore malls. As a result of the tough retail trade environment particularly for mass-market fashion, landlords, especially of suburban malls, have switched to having more food and beverage outlets.

The percentage of net lettable area alloted to fashion retailing at suburban malls has declined from around 40-50 per cent in the late 1990s to early 2000s to 20-25 per cent today. Conversely, F&B's share has gone up from some 15-20 per cent to around 40 per cent.

This in turn has given rise to an oversupply of F&B outlets, intensifying the competition for labour. Moreover, with the trend of consumers ordering their meals via food delivery apps and which are prepared at ghost or cloud kitchens - shared kitchen spaces for F&B brands - demand for restaurant space will also come under pressure.

Running out of options to fill space at not-so-popular malls, some landlords have been increasingly pressuring tenants who want to lease space in one of their more popular malls to also take up space in their less well-performing malls, where takings for retailers are sub-par. It's almost like scraping the barrel.

How long can retail landlords hold out in the digital age and sharing economy? More challenges lie ahead in the next five to 10 years.

In the immediate term, retailers will have to grapple with the impact of the coronavirus outbreak. Retailers in places like Orchard, MBS and Raffles City that rely on tourists will see their takings affected by the temporary entry ban for Chinese passport holders who are not residents here as well as travellers who were in mainland China recently.

Singapore retail rents will be impacted.

Lack of catalysts

Even after the virus outbreak ends, there is a lack of catalysts to fuel any significant rental recovery for retail space.

Sure, the pipeline of new retail space is shrinking. But there is already a substantial existing stock of retail space on the island. The per- capita demand for physical retail space may shrink in future.

That said, supermarkets and convenience stores selling essential goods and perishables are still likely to need a physical store presence, as will some eateries and services trades such as hair salons and dentists.

With the surfeit of retail space, some landlords in the Orchard area for instance could convert the upper levels of malls, where shopper traffic and rents are lower, into, say, office space to be leased to coworking operators. Such facilities would be popular among office occupiers, and at the same time help raise footfall in the building, benefiting retailers on lower levels.

The nature of retail will evolve, and with it the texture of demand for retail space will change. Already, retailers and landlords have started to experiment with omni-channel and experiential retailing. Some online retailers are heading for brick-and-mortar stores.

As new sources of demand arise, there will be new tenant profiles. There will be winners and there will be losers.

The dominant players - with well located malls next to MRT stations and strong shopper catchment - will survive. Landlords with just a few malls in not-so-choice areas may find it increasingly challenging to survive. Some mall owners may call it quits.