Waning rents, tenant demand prompt malls' repositioning

Singapore

IN the heyday of the retail-property market, many landlords were eager to slice retail spaces into smaller units to lease out at higher rents per square foot. Now in the face of softening rents and dwindling tenant sales, some landlords are changing tack to lure back the bigger tenants they were once inclined to shoo away.

While this curating of tenant mix may lend support to mall occupancies and footfall, it will do little to reverse an anticipated fall in retail rents next year.

Projections for retail rental declines in 2016 go as far as 5 per cent, judging from consultants' estimates. For one thing, the looming supply of retail space is worrying.

Based on the past three-year average annual net demand for retail space island-wide and assuming a similar level of space take-up ahead, it will take close to four years to absorb the upcoming new retail space, Knight Frank head of research and consultancy Alice Tan said.

"With an estimated 2.44 million sq ft of gross retail space to be completed next year, the search for retailers to fill both existing and new spaces is slated to intensify," she said, pegging her average rent forecast in the Central Region to a 3-5 per cent drop for 2016.

Expecting up to a 3 per cent decline in retail rents island-wide next year, Chesterton Singapore's managing director Donald Han sees the same issues of manpower crunch, lower tourist arrivals and the strong Singapore dollar as well as competition from e-commerce continuing to plague retailers next year.

While data from the Urban Redevelopment Authority showed a 2.9 per cent drop in retail rents in the Central Region (covering 22 planning areas that include the central area and fringe area, which extends to Queenstown, Geylang, Bishan and Sentosa) over the first three quarters of this year, specific baskets tracked by some consultants registered a bigger drop. DTZ's recent report flagged a 3.7 per cent quarter-on-quarter fall to S$30.90 per sq ft in the third quarter for average prime first-storey rents island-wide, the lowest since the first quarter of 2006.

An overcapacity in retail space and weak tenant demand have prompted retail landlords to review their leasing strategy, Mr Han observed.

"In the past, it was about cutting up large valuable retail space, cutting up into smaller areas and achieving higher rents per square foot (psf). Now it's about maintaining occupancy and preserving rents, keeping a balance in large and small retail tenant mix," he said.

While tenants occupying large gross floor areas may pay lower rents on a psf basis (even paying single-digit dollar per square foot per month in some cases), they can drive higher footfall traffic into the mall, Mr Han pointed out.

"Some anchor tenants like commercial schools and medical centres provide ready and captive customers during the weekdays to shopping malls. Students, for instance, require F&B amenities during lesson breaks and they feed into the mall's retail offering."

A large tenant instead of more smaller tenants will mean less work for the landlord in terms of lease management - and the landlord does not need to provide as much space for walkways, Mr Han noted.

This is why some landlords have turned to less conventional tenants such as childcare or daycare centres and fitness centres as they are able to draw traffic to the malls.

Large tenants have sprung up in some shopping malls in the city centre, consultants noted. Among them, Raffles Medical opened a multi-disciplinary medical centre at newly renovated Shaw Centre in June and Harvey Norman just expanded its store space at Millenia Walk with the opening of its new 100,000-sq-ft flagship outlet in the mall.

More new-to-market concepts have also emerged. Top Japanese cooking school ABC Cooking Studio opened at Takashimaya in April this year, while Millenia Walk ushered in a new indoor snow sports centre, Urban Ski, in July. Knightsbridge is set to feature Singapore's first Apple store next year.

Marina Square also welcomed Emporium Shokuhin, Singapore's first integrated Japanese emporium that took up over 34,000 sq ft of space, in September and South Korean Pororo Park, which opened its first and largest South-east Asian character-themed indoor playground spanning 11,000 sq ft at Marina Square's new retail wing last month. BT understands that a major commercial school is also looking at taking up some 100,000 sq ft of space at Marina Square.

With heightened competition for a limited pool of established retailers, landlords are now more open to new retail concepts which are either destination-centric or offer unique brand positioning, Ms Tan observed.

The strategy of attracting activity-driven tenants is paying off for Pontiac Land's Millenia Walk.

"Over the past year, Millenia Walk has yielded double-digit growth for our rental reversions, and increased occupancy by over 20 per cent," said Orphelia Huang, assistant manager for corporate communications at Pontiac Land, which is targeting above-95 per cent occupancy rate for the mall next year.

Among other things, Millenia Walk has also brought in specialised F&B offerings with the opening of Nihon Street where each Japanese food outlet already has a strong existing following, and reached out to male shoppers with new brands. "For 2016, we will continue our strategy to carefully curate our selection of tenants," Ms Huang said.

In the varied retail landscape, there are department stores which will likely continue to consolidate in the near term amid weak retail sales, high business cost and manpower constraints, said Cushman & Wakefield research director Christine Li.

Just this year alone, Marks & Spencer vacated The Centrepoint, John Little closed its Marina Square and Tiong Bahru stores and Metro closed its outlet at Compass Point in August and will be closing its City Square Mall outlet by the end of this year. Wing Tai, which carries brands such as G2000 and Topshop in Singapore, has said it plans to close some of its retail outlets.

The challenging retail environment is keeping landlords on their toes to refresh their mall offerings.

CapitaLand recently converted Tampines Mall's level 5 open roof to a new education hub with well-known educational centres such as Yamaha Music School, Julia Gabriel Centre, MindChamps and Stalford Learning Centre. It is also redeveloping Funan DigitaLife Mall into an integrated development.

Malls which are part of an integrated development are able to tap into ready catchments of residents, working professionals and business and leisure travellers, said CapitaLand Mall Asia head of retail management for Singapore Teresa Teow. "To serve the needs of shoppers who use our malls as one-stop lifestyle destinations, we are increasing the percentage of retail space allocated to F&B, from about 19 per cent five years ago to about 22 per cent currently."

Similarly for Frasers Centrepoint malls, the proportion of F&B tenants has increased. At Causeway Point in Woodlands, the proportion of net lettable area of F&B was 16.3 per cent in 2010 (before upgrading), compared with the current 23.1 per cent. In other malls such as Changi City Point, the F&B proportion is even higher, said a spokesman for Frasers Centrepoint Asset Management, the manager of Frasers Centrepoint Trust.

Tan Sulian, senior director for retail at Savills Singapore, said: "Landlords who are more proactively adjusting their trade mix and tenant mix will result in better occupancies and rents because eventually they will attract better tenants, who are also more willing to pay better rents."