Brighter retail outlook in 2010
Even so, players have their work cut out as more than a million sq ft of space comes onstream, say PETER SEE-TOH and PNG POH SOON
THE retail market not only faced the onslaught of the global financial crisis but also had to brave additional headwinds arising from a huge amount of new retail supply coming onstream in 2009. Lettable retail space increased by 1.7 million square feet, a whopping 51/2 times more than the 10-year average. New retail space in Orchard Road alone accounted for more than half the new stock, following the opening of Orchard Central, ION Orchard, Mandarin Gallery and 313@Somerset.
As retail sales plunged at the beginning of 2009, rentals were predicted to fall by as much as 20 per cent with vacancy rates hitting 15 per cent. Interestingly, the situation did not turn out as bleak as expected. Despite the significant spike in retail supply, demand was relatively strong and occupancy rate in Q409 reached a 15-year high of 95.7 per cent. (see Exhibit 1)
Rental slide
Despite the high occupancy rate, rentals fell with the new supply. The islandwide shop space rental index for Q408 and Q409 was 126.8 and 116.4 respectively, indicating a drop of 8.2 per cent. Rentals suffered most in Orchard Road (central)/Scotts Road, falling by some 14 per cent. Average monthly gross prime rental as at end-2009 was $40.43 per square foot per month (psf pm), down from $47.14 psf pm at the start of the year.
It was the first time in five years that prime rentals in Orchard Road registered a fall. Prime rents in Orchard Road (fringe), Marina Centre, City Hall and Bugis dipped by varying magnitudes, with the exception of suburban malls where rentals bucked the trend and rose from $29.10 psf pm to $29.32 psf pm.
What accounted for the less dismal than expected performance in the retail market?
One major reason was government action to support the economy through a $20.5 billion Resilience Package in January 2009, which helped Singaporeans stay employed. The measures shored up confidence as the unemployment rate last year was a relatively low 3 per cent.
Landlords also played their part as most of them helped ease tenants' burden by passing on the benefits of a 40 per cent property tax rebate implemented with the package. This helped reduce tenants' operating costs.
Further, landlords and mall managers took measures such as stepping up advertising and promotion (A&P) efforts for their malls and helping struggling tenants explore ways to improve sales.
Another reason was the retailers' confidence in Singapore in the longer term. According to the Department of Statistics, the population stood at 4.99 million last year. While the government is slowing down the hiring of foreign workers, the population is likely to continue growing, albeit at a slower pace. In the long run, Singapore is geared to a population of 6.5 million.
In line with population growth, private consumption expenditure has also increased by 12.7 per cent from 2005 to 2009. Average monthly nominal earnings grew from $3,063 in 2000 to $3,872 in 2009, at an average of 3.3 per cent per annum. While average earnings in 2009 fell for the first time in the past five years, it is expected to pick up as the economy recovers this year (see Exhibit 2).
Finally, retailers are cautiously optimistic as they look forward to the opening of the two integrated resorts. Some expect more tourist dollars to start flowing into the city as the global economy recovers.
Indeed, the tourism statistics show some 'green shoots' as Singapore saw more visitors arriving from the second half of last year. Visitor arrivals in January this year grew 17.6 per cent year-on-year to reach 908,000. For 2010, the Singapore Tourism Board has forecast 11.5-12.5 million visitor arrivals. This would be an improvement of more than 20 per cent over 2009.
Monthly retail sales in January saw a positive uptick with sales up 2.3 per cent year on year. The luxury goods segment showed signs of recovery with watches and jewellery sales rising 10.3 per cent y-o-y. Although retailers, and F&B operators in particular, saw strong sales during the year-end festive season, it remains to be seen if such numbers are sustainable.
Potential bugbear
What are the key challenges for landlords and retailers in the near future? Is upcoming supply a bugbear?
From a retailer's perspective, operating costs are always a major concern with rentals and labour costs forming the bulk of it. With the recent government measure to phase in higher foreign workers levies, operating cost is expected to rise in the future. While retailers have a strong incentive to reduce their dependence on foreign workers, they may also face difficulty in attracting locals to take up jobs in the service sector.
Furthermore, as the economy improves, more Singaporeans are travelling overseas for holidays, shopping and dining.
The recent National Association of Travel Agents Singapore (Natas) fair saw sales scale a new high of $63 million. Shopping centres in Singapore are no longer just competing with one another but also with overseas malls.
More worrying signs come in the form of new retail space of 1.92 million sq ft this year. About 65 per cent of the upcoming retail space has been pre-committed. While landlords welcome the strong take-up numbers, competition is expected to be keen. It remains to be seen if the pie is big enough for all players.
Developers and managers of ageing shopping malls are also expected to embark on asset enhancements to compete with the new kids on the block. The challenge for mall owners is to re-invent themselves by bringing in new retailers and concepts to address the common complaint that one mall looks much like another.
Competition will intensify in 2010 and beyond when more than a million sq ft of new retail space will be added to the Marina Bay precinct. Marina Bay will become a strong alternative to Orchard Road, being a new retail focal point offering shoppers a fresh experience (see Exhibit 3).
As we move into 2010, we are hopeful that the retail sector is poised to benefit from the broad economic recovery. The Ministry of Trade and Industry expects the economy to grow by 4.5 to 6.5 per cent. In the absence of any unforeseen circumstances, we can expect overall prime rentals to increase by up to 5 per cent.
However, in the near term, we also expect to see consolidation by retailers who are likely to trim non-performing units. In light of this, non-prime retail space could see a mild correction.
Nonetheless, we expect suburban rents to remain firm. It seems that as the economy recovers and the competition hots up, players in the retail market have their work cut out for them.
The writers are managing director of retail services and senior manager of investment respectively at Knight Frank Singapore
Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.
Shopping time: New retail space in Orchard Road alone accounted for more than half the new stock in 2009, following the opening of Orchard Central, ION Orchard, Mandarin Gallery (above) and 313@Somerset
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