Jul 08, 2014

    Retail rents to hold up despite new supply

    RETAIL rents may either hold or inch up over the next few years despite new supply coming on stream. This is supported by a healthy demand for retail space and the fact that rents tend to be "sticky" in nature, property analysts said.

    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 sq m of retail space supply from this year to 2016.

    Chua Yang Liang, JLL's head of research for Singapore and South-east Asia, said 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 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 Lee Lay Keng, DTZ's regional head of research.

    "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 expected prime retail rents in the Orchard/Scotts Road area to rise in the next three years, given limited new supply there.

    Ong Kian Lin, a Maybank analyst, estimated that Orchard Road prime retail rents will grow 2.5 per cent from this year to 2017 on a compound annual growth rate basis.

    Suburban malls enjoy higher footfall than some prime luxury malls in 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 malls in Orchard Road, which are patronised more by tourists.

    The gap between Orchard Road and suburban mall rents has also narrowed over the years, said Alan Cheong, head of research at Savills Singapore.

    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 said that grouses by retailers over high rents stemmed 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 into 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."