Q2 net demand for retail space shrinks by record 93,000 sq m

Singapore

THE severe bruising of the Singapore retail sector amid the Covid-19 pandemic has been reflected in the latest official data on the retail property market.

The Urban Redevelopment Authority's (URA) rental index for retail space in Singapore's central region slipped 3.5 per cent quarter on quarter in Q2 2020 - to its lowest level since the index began in 2011.

In the first quarter of this year, the index declined 2.3 per cent.

Islandwide net absorption of retail space shrank by 93,000 square metres of net lettable area in Q2 this year.

This was slightly more than double the 43,000 sq m decrease in Q1 2020 and also the biggest contraction since URA's time series for this segment began in 2011.

The islandwide vacancy rate for retail space rose to 9.6 per cent as at the end of the second quarter of this year from 8 per cent as at the end of the previous quarter.

CBRE's head of research for South-east Asia, Desmond Sim, highlights that URA's data also shows that the largest retail rent drop was seen in the Central Area, where the rental index fell by 4.9 per cent quarter on quarter (qoq) in Q2 2020.

"This can be attributed to higher degrees of stress in the Downtown Core, Marina Area and Orchard Area, as footfall in these locales have been negatively impacted by travel restrictions and work-from-home measures," he said.

Mr Sim also noted that tenant retention has been a challenge, and the number of closures in Q2 2020 has escalated in the F&B and entertainment sectors.

"There were also consolidations for tenants experiencing cashflow difficulties while they place a higher priority on their better-performing locations," he added.

Colliers International's head of research for Singapore, Tricia Song, noted that the retail industry is one of the hardest-hit sectors by the virus outbreak.

"While retail sales are likely to see a short-term rebound as malls reopened on June 19 (under the phase 2 easing), we believe recovery of the overall retail market is likely to be slow, with no inbound tourist spending in the near term, and structural challenges such as increasing competition from e-commerce as well as high occupancy costs."

Colliers expects average retail rents for prime floors in the suburbs as well as Orchard Road to decline 5 per cent or more in 2020 and stay flat in 2021, despite limited new supply.

Cushman & Wakefield's associate director of research for Singapore and Southeast Asia, Wong Xian Yang, too, expects retail to continue falling as the market grapples with higher vacancy rates and limited demand.

"The retail scene will see more casualties as social distancing measures are expected to persist," he said.

"Many activity-based tenants in sectors such as F&B, entertainment or health and wellness will not be able to operate at full capacity, making their businesses unviable."

"New demand will be limited as well, as tenants explore online or delivery options given economic uncertainties and Covid-19 concerns," Mr Wong added.

On a more positive note, JLL Singapore's head of research and consultancy, Tay Huey Ying, said that retailers with a deeper balance sheet and a medium- to long-term perspective are likely to continue to anchor in Singapore as a gateway to Asia.

"The eventual successful containment of the Covid-19 outbreak would see the government lifting safe-distancing measures and travel restrictions, and reinvigorating economic activities," she said.

"Retailer and consumer confidence should return, and business expansion should resume." In such a scenario, occupier demand should recover as foot traffic and retail sales pick up alongside economic growth.

"Coupled with the supply tightness, vacancy rates could fall to support rent recovery by 2022," Ms Tay concluded.

Data released by the URA on Friday also showed that prices of retail space in the central region fell 1.5 per cent qoq in Q2 2020, although this was a smaller drop than the 3.1 per cent decrease in the previous quarter.