2014-09-24

Rental Gap Between Shops in Orchard Road and Regional Centres Further Narrows in 3Q 2014

According to international property consultant, Colliers International’s latest report, rents of prime retail space in Singapore were kept in check in 3Q 2014, despite healthy leasing activities with the debut of new brands and expansion of existing ones.  This is mainly due to declining tourist arrivals since March 20141, which has led to weaker retail sales performance.

Mr Calvin Yeo (杨光伟), Deputy Managing Director of Colliers International, says, “The decrease in tourist volume and lacklustre retail sales have exacerbated an already-highly challenging and competitive trading environment.”

In addition to rising costs, shrinking profits, tighter foreign worker policies and labour crunch, retail operators face competition from e-commerce retailers and online food delivery services.  The steadily-increasing online shopping trend could eventually change the traditional retail model; consequently, putting pressure on the customary operating practices of brick-and-mortar shops.

Mr Yeo adds, “These difficulties are inherently more acute for smaller brands, and these would be among the first casualties to exit the retail industry.  Given the Darwinian survival-of-the-fittest nature of the retail sector, shopping malls might evolve to be primarily occupied and dominated by the stronger and larger brands – in the likes of fast-fashion houses of Uniqlo and H&M.”

Rents

In 3Q 2014, the average monthly gross rents of prime retail space in Orchard Road softened slightly by 0.5 per cent from S$36.42 in 2Q 2014 to S$36.25 per sq ft. 

Meanwhile, the average monthly gross rents of prime retail space in the Regional Centres gained a slight 0.3 per cent from S$33.61 per sq ft in 2Q 2014 to S$33.72 per sq ft.

Consequently, the rental premium that prime retail space in Orchard Road commands over similar space in the Regional Centres further narrowed from 8.4 per cent in the preceding quarter to 7.5 per cent in 3Q 2014. 

The narrowing rental gap reflects the dependency on tourist dollar by malls in Orchard Road, compared to the steady flow of local community footfalls captured by malls in the Regional Centres. The challenging retail environment has spurred landlords to become more progressive and pro-active in managing their tenant-mix to offer a wider variety and a more positive shopping experience.

For instance, J.Avenue in JCube (Jurong East) is inspired by the popular Harajuku and Hongdae shopping districts in Tokyo and Seoul, featuring some 70 shops selling fashion apparel and accessories.  The Mongkok precinct in Jurong Point (Boon Lay) is conceptualised to look similar to the iconic district in Hong Kong, featuring more than 50 retail, and food and beverage shops.

Capital Values

Over at the sales market, with investment interest in retail units remaining languid, and with overall demand volumes dropping, capital values remained flat in 3Q 2014.

The average imputed capital value for prime strata-titled retail space in Orchard Road remained at S$6,942 per sq ft in 3Q 2014, unchanged for the past 6 quarters.  Meanwhile, the average imputed capital values for similar space in the Regional Centres had stayed stable for 3 quarters, trending at S$4,491 per sq ft in 3Q 2014.

According to the Urban Redevelopment Authority Real Estate Information System, only 106 caveats were lodged in the first 11 weeks of 3Q 2014 for strata-titled retail premises.

Outlook

Looking forward, retail rents are expected to remain stable for the rest of 2014.

Ms Chia Siew Chuin (谢岫君), Director of Research & Advisory at Colliers International, says, “With greater pressure on malls in Orchard Road which heavily depend on tourist patronage, we are likely to see a minor adjustment of -1 per cent to 0 per cent in the average monthly gross rents for prime ground-floor retail space.  Regional Centres are expected to see a comparatively-better rental growth of between 1 per cent and 2 per cent for the entire year.”

She concludes, “In the strata-titled retail space market including shops in mixed-use developments, demand and transaction volume are expected to be largely muted, with capital values expected to continue to trend laterally.”

1. According to the Singapore Tourism Board, apart from year-on-year (YoY) increases seen in January and February, visitor arrivals have on the decline in 2014 – falling in consecutive months by 5.2 per cent in March, 2.3 per cent in April, 6.2 per cent in May, 8.4 per cent in June and 0.9 per cent in July.