Retail rents to hold up

According to yesterday’s Business Times, Retail rents may either hold or inch up over the next few years despite new supply coming onstream. This is supported by a healthy demand for retail space and the fact that rents tend to be “sticky” in nature, property analysts say.

This projection provides cold comfort to retailers looking for a breather from rising business costs. It also goes against the government’s hopes of easing rents with its estimated 600,000 gross square metres of retail space supply from 2014 to 2016.

JLL head of research for Singapore and South-east Asia Chua Yang Liang believes that retail rents will remain stable in the next three years, supported by healthy pre-commitment levels in recently completed malls and for the uncompleted pipeline.

For instance, Orchard Gateway recently opened with nearly full occupancy while the soon-to-be completed refurbishment of Shaw Centre has secured 90 per cent commitment.

“Vacated spaces have been quickly taken up as evidenced by Metro’s takeover of Robinson’s former 130,000 sq ft premises at Centrepoint, which is poised to be completed by the fourth quarter,” Dr Chua said.

In the suburban areas, retail rents are also expected to hold up, even though a good 65 per cent of the estimated 4.1 million sq ft of new net lettable retail area to be rolled out by 2016 will be located in these regions, while only 7 per cent of the supply will be in the Orchard/Scotts area, said DTZ’s regional head (SEA) of research, Lee Lay Keng.

“Upcoming malls such as The Seletar Mall and One KM have reported healthy pre-commitments while there are still retailers looking at expanding in the suburban malls to tap the population living in nearby housing estates,” she said.

Analysts expect prime retail rents in the Orchard/ Scotts Road area to rise in the next three years given limited new supply there. Maybank analyst Ong Kian Lin estimates that Orchard Road prime retail rents will grow 2.5 per cent from 2014 to 2017 on a compound annual growth rate basis.

Suburban malls enjoy higher footfall than some prime luxury malls on Orchard Road, possibly because residents frequent the former more for necessity shopping, he observed. But the conversion rate of footfall to sales is higher at Orchard Road malls, which are more patronised by tourists.

The gap between Orchard Road and suburban mall rents has also narrowed over the years, said Savills Singapore research head Alan Cheong. Monthly rents (without the percentage gross turnover portion) for prime retail space in Orchard Road and suburban malls averaged $34.60 and $31.10 psf respectively in the first quarter.

Mr Cheong noted that grouses by retailers over high rents stem from a disconnect between declining sales and a stubbornly high rental base. Retail rents here typically consist of a base rent and a percentage of gross turnover, so a decline in sales of a tenant should translate to lower rent paid to the landlord. Yet, rents have not budged for some retailers.

Douglas Benjamin, chief operating officer of FJ Benjamin Holdings, an international luxury and lifestyle brand retailer, said: “It’s fair if you are in a mall where business is good and the landlord wants to increase your rent. But if your sales have fallen, maybe because another mall has opened next door, it doesn’t make sense for your landlord to want to raise rents.”

But a study by the Ministry of Trade and Industry (MTI) showed that for most of the renewals in 2012 and 2013, the effective increase in rent per annum was in line with inflation over the period of their lease. Growth in retail rents in the core downtown and city fringe areas was also flat in Q1 compared to a year ago, according to the URA rental index.

But rentals for prime spaces islandwide tracked by Knight Frank, which looked at more comparable units of 350-1,500 sq ft with the best frontage, connectivity, footfall and accessibility, were relatively resilient. Rents for such spaces rose 1.9 per cent in the first quarter from a year ago, driven by higher rents for such spaces in Marina, City Hall and Bugis.

Apart from rents, retail businesses are contending with higher labour costs, tighter foreign workerpolicies and a strong Singapore dollar. The growth of e-commerce is also eating into the sales pie of brick-and- mortar retailers, consultants say.

“We believe that over time, online shopping will be a game changer and unless one is talking about the very high-end products or those where personal service is still deemed irreplaceable, the rest of the retail industry will undergo major structural changes,” Mr Cheong said.

“Only food and beverage may for now survive but there is a limit to how much space a landlord can convert to F&B use,” he added. “Therefore, we believe that it could be online shopping, working through the demand side, rather than increased supply that will ultimately bring down rents.”

Ms Lee of DTZ, however, downplayed the impact from e-commerce. “There will still be consumers who seek the wholesome retail experience of seeing, touching and trying on their goods before they buy,” she said. More online retailers such as blog shops are also setting up physical shops, she added.

http://www.businesstimes.com.sg/premium/top-stories/retail-rents-hold-despite-supply-20140707

In a separate report, Rents have been a sticky issue for retailers, even though consecutive data released lately shows that retail rents have eased and will be capped by the upcoming supply in retail space.

Retailers decry that rents have not factored in their declining sales. This runs contrary to the fact that most lease agreements have a variable rent component based on gross turnover (GTO).

Most landlords here, except for strata-titled owners, charge their tenants a base rent and a percentage of GTO. The rent structures vary across tenants and locations. Some tenants pay both a base rent and a turnover rent of 0.5-2 per cent; others pay by either that formula or purely turnover rent of 10-20 per cent – whichever is higher. There are other permutations in the rent calculations.

Whatever the case, having a turnover rent as part of the total rent computation should have made overall rents more susceptible to the revenues of retailers.

http://www.businesstimes.com.sg/premium/top-stories/why-retail-rents-are-still-sticking-point-20140707

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s