Rental gap narrowing between suburban and Orchard malls

Singapore

THE rental gap between prime spaces in suburban malls and Orchard malls has been narrowing - and this trend is slated to continue into 2016.

Property consultants noted that the relative resilience of suburban malls stems from their larger local catchment and lower susceptibility to tourist spending, which has been dealt a blow from lacklustre tourist arrivals and competition from other global cities for their spending.

While the retail rental index of the Urban Redevelopment Authority (URA) for the Central Region showed a 2.9 per cent drop in retail rents over the first three quarters of this year, the Central Area marked a bigger 3 per cent drop compared to a 2.4 per cent decline in the Fringe Area.

URA's retail rental indices do not track malls located in the far-flung areas of Jurong, Tampines and Yishun, though rental data by unit size, floor level and district is available on its website.

Data from consultancy firm Savills shows that prime-facing spaces in Orchard malls have fallen by a bigger 4 per cent over the first three quarters of this year, compared to 2.9 per cent in suburban malls.

"On the whole, we still haven't seen any concrete plan to arrest the pilferage of sales from online retailers who are waging a guerrilla war against sitting targets," said Savills research head Alan Cheong.

He expects rents in suburban malls to dip by up to 2 per cent and those in Orchard malls to fall by a bigger 3-5 per cent next year.

Based on Knight Frank's computations, the rental premium of prime retail spaces of Orchard Road malls over suburban malls has been steadily shrinking over the last three years. The average prime rent of Orchard Road malls was 1.09 times of that in suburban malls in the last nine months this year, down from 1.12 times and 1.13 times in 2014 and 2013 respectively.

"This demonstrates the higher resilience of suburban mall prime space rents compared to Orchard Road's," said Knight Frank head of consultancy and research Alice Tan. "Nonetheless, the limited availability and limited upcoming supply of new retail spaces in Orchard Road should limit rental declines for Singapore's prime shopping belt going forward, keeping rental premium between Orchard Road and suburban prime retail spaces at similar levels for 2016."

Some Orchard Road malls have found it hard to gain traction. Wheelock Properties' Scotts Square has seen many of its tenants come and go since its opening in 2012. Shaw Centre has similarly failed to ramp up its occupancy and pull in customers since its revamp last November.

Far East Organization's Orchard Central, now 85 per cent occupied, will be undergoing a revamp until Q3 2016, during which 17 per cent of its tenants will have to close or relocate by Dec 31.

Cushman & Wakefield research director Christine Li noted that popular retail brands previously present only in Orchard Road have made their way into suburban malls, hence diluting retail sales in Orchard malls.

Looking at prime-facing retail units on ground floor of not more than 3,000 square feet, Ms Li is projecting a 3-3.5 per cent drop in rents in Orchard Road, a 4 per cent fall in the city-fringe, and stable rents for suburban malls next year.

A spokesman for Frasers Centrepoint Asset Management, the manager of Frasers Centrepoint Trust (FCT) which owns a number of suburban malls, stressed that suburban malls have very localised catchment, roughly 3-5km radius in the primary catchment and slightly further afield if the mall is easily accessible by MRT or bus.

"We think the outlook for suburban malls should remain stable in general, as consumption in this sector are mostly necessity spending," he said.

FCT finished the financial year ended Sept 30 with an average rental reversion of 6.3 per cent. Its manager is further tweaking tenant mix at Changi City Point and Bedok Point, where occupancies were 91.1 per cent and 84.2 per cent respectively as at Sept 30. Its Northpoint shopping centre in Yishun is being expanded as part of the integrated Northpoint City project.

"In most instances, the challenge is not so much in finding a tenant as there is always interest in space in suburban enclosed malls. It is more a question of finding the correct tenant that is also willing to pay the target rent," FCT manager's spokesman said. "Occupancy-wise, we should be able to maintain our current level or improve slightly over our last financial year."

But not all suburban malls are faring well too. Consultants note that there is greater competition in Jurong East where there are five malls in the same catchment - namely JCube, JEM, WestGate, Big Box and IMM Building.

"While household and office population there is on the rise, the majority of homes and offices are still under construction and the newly completed malls have injected more supply at a faster rate than demand," said Chesterton Singapore managing director Donald Han.

Woes of JCube arose with the proliferation of malls in the Jurong East regional centre in recent years. Since Jem and Westgate opened across the road in 2013, JCube's occupancy rate has been on a slide since end-2013 from 100 per cent to 83.7 per cent as of Sept 30 this year. Though it has undergone several rounds of mall repositioning, one industry player felt that the mall has not yet found its "identity".

"Both JCube and IMM are undergoing a series of asset enhancement initiatives. We think the malls here may underperform other areas where there are less mall competitors such as Junction 8, Causeway Point or Bedok Mall," Mr Han said.

CapitaLand's Tampines Mall and Junction 8 marked full occupancy as at Sept 30 and some asset enhancement works are ongoing for Tampines Mall.

When asked about its malls in Jurong Gateway, CapitaLand Mall Asia head of retail management for Singapore Teresa Teow explained that the three malls are positioned differently to complement each other, with Westgate serving as a premier lifestyle and family mall, IMM Building as Singapore's largest outlet mall, and JCube being a leisure and entertainment hub in the west that houses Singapore's only Olympic-size ice rink.

JCube recently added a trendy retail zone, J.Avenue, that houses 100 shops offering chic, affordable merchandise. "We continually reinvent our malls to ensure that they stay relevant and attractive to shoppers," Ms Teow added.

Large landlords such as CapitaLand and Frasers Centrepoint are also embracing technology, making their rewards programme available via mobile apps.

CapitaLand's Capitastar goes further to glean the shopper preferences of some 800,000 Capitastar members in Singapore from the aggregated data, which enables CapitaLand to work with retailers to push out targeted retail offerings through the Capitastar mobile app.

Consultants note that malls which are connected to an MRT tend to do well. Size matters too, Mr Han added, with larger malls of more than 200,000 sq ft in net lettable area able to enjoy economies of scale and provide a variety of tenant-mix offering to consumers.

Ms Tan noted that while landlords are now more receptive to negotiate rentals with established retailers, the current structure of base rents vis-a-vis variable rents has not changed much, with limited room for adjustment.