Prime retail rents set to rise as Q3 vacancy eases to three-year low: Savills

OVERALL retail occupancy in Singapore improved in the third quarter of 2022, said the research arm of global real estate agency Savills on Thursday (Nov 24). 

In a report, Savills Research said it expects rents for prime locations to keep rising amid a recovery in shopper traffic and a tightening of property supply.

This comes as Singapore’s Q3 retail vacancy rate eased to 7.8 per cent – the lowest since 2019 – due mainly to a higher take-up in the Central Region.

In that region, the retail vacancy rate was down 0.5 per cent quarter on quarter at 9.3 per cent. 

Savills said improved shopper traffic at physical stores has driven higher take-up rates in all areas across the Central Region, particularly in the city fringes. Improvements in tourist numbers have also sent the take-up in the Downtown Core and Orchard Planning areas up.

“The sense of a gradual return to normalcy is giving retailers confidence,” it added.

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However, the retail vacancy rate in the Outside Central Region remained unchanged at 5.1 per cent, which Savills believed could be possibly due to subdued take-up at the revamped Grantral Mall @ Macpherson.

Overall, prime retail rents continued to rise as more foreign brands entered the Singapore market. Recent examples include Swedish apparel brand & Other Stories, which set up its first South-east Asian boutique in Ion Orchard.

Japanese streetwear label SNKRDunk, another new entrant, has set up its international flagship store in Mandarin Gallery.

Such retailers are more willing to match landlords’ higher rental expectations. Savills noted that monthly prime rents in the Orchard and the suburban areas rose, respectively, by 1 per cent to S$21.30 per square foot (psf) and by 0.7 per cent to S$23.20 psf, quarter on quarter.

Savills said it expects increases of 1 per cent to 2 per cent in prime Orchard Road retail rents, and 2 per cent to 3 per cent in prime suburban rents in 2023.

The agency also predicted that retail sales revenues will rise in spite of inflationary pressures, driving up advertising and conservancy costs in turn. In Savills’ view, these factors will “override the softer economic conditions and ultimately lift rents marginally”.

The increase in Savills’ prime retail rents bucks the trend in rental growth data from the Urban Redevelopment Authority (URA).

The URA’s figures show that the retail rental index for the Central Region fell by 0.4 per cent in Q3. This was an extension of the 0.5 per cent quarter-on-quarter decline recorded in Q2.

The two sets of data suggest that the market remains mixed, with retail rental growth pegged to location, says Savills.

The agency also expects retail rents to continue increasing in the Central Business District (CBD), noting that the return of office workers has already driven up fees for tenants in the area.

Moreover, the impending closure of Clifford Centre at Raffles Place will push several tenants either to non-prime locations, or to close their businesses because they may be priced out of alternative units in the vicinity.

Savills expects retail vacancies in the CBD to be backfilled by well-performing retailers or new entrants who are willing to meet the new rental expectations: “This could potentially alter the retail mix in the market, as the reshuffling of tenants continues, attracting different kinds of retailers.”

For example, luxury carmaker Porsche will close its showroom and move to a central location. Its upcoming Guoco Midtown outlet follows the opening of Mercedes’ showroom in Great World City.

Savills added that Clifford Centre’s closure – which is temporary – will tighten the property supply, further driving up retail rental growth in the CBD. 

The agency also notes that the island-wide supply pipeline remains low, with the five-year annual average for 2022 to 2026 coming in at 515,000 square feet (sq ft). This is compared with the historical five-year annual average of 732,000 sq ft.

Nonetheless, Savills estimated that the potential supply of newly completed retail space should more than double to over 700,000 sq ft in the next two years.