Monday, May 18, 2009

Time for mall owners to help with rent cuts

IF ONE accepts that FJ Benjamin's latest financial numbers are a fair reflection of what is happening in the retail industry, then the time might be right for mall owners to cut rents, if only to ensure their own survival.

FJ Benjamin saw its turnover shrink significantly in the quarter ended March 31. It registered a net loss (attributed to lower sales and foreign exchange losses), even after struggling with cost-cutting measures.

Reporting its quarterly financial results last Monday, it said gross margins slipped to 38 per cent from 40 per cent due mainly to higher promotional activities (such as sales).

Staff costs dipped 9 per cent to $9.5 million, and other operating expenses fell 38 per cent to $4.6 million.

Still it was not enough to displace the 21 per cent fall in turnover to $69.1 million, down from $87 million in the previous corresponding quarter.

Apart from continuing to squeeze margins and cut costs there is very little else FJB can do, which is probably why its CEO Nash Benjamin said earlier this year that it would need to 'focus our efforts on working with our landlords to reduce rental and other overheads.'

Rental of premises registered $10.32 million in its current reporting quarter, down marginally from $10.6 million a year ago. However, as a proportion of turnover, rentals have increased to about 15 per cent, up from 12 per cent a year ago. This in turn was an increase from 10 per cent in 2007.

FJB is one of the top 10 tenants of Starhill Global Reit which holds stakes in Wisma Atria and Ngee Ann City. The reluctance of landlords to give substantial rental rebates is perhaps best represented by retail rental revenue generated at Wisma Atria of $11.56 million for the quarter ended March 31, down only marginally by 0.8 per cent from a year ago. RSH, which has brands like Zara and Mango, also reported poorer results recently, with net profit contracting by 45.1 per cent to $8.41 million for the quarter ended December 31, 2008. It also reported that its Singapore business saw profit before tax fall by 26 per cent due to higher operating expenses and lower revenue.

RSH spoke out against high rents here recently after several retail associations led by the Singapore Retailers Association publicly asked landlords to cut rents by between 20-30 per cent in February.

BT had reported then that major mall earners were not convinced that occupancy costs were too high. However, RSH responded by saying that every tenant has a level of profitability they have to achieve to sustain their business, and that level varies from retailer to retailer.

There are not many retailers in Singapore that are publicly listed so FJB and RSH's reported financial numbers are a useful barometer of how the entire retail industry is doing as a whole.

Mall owners, on the other hand, still appear to be doing well. Many of Singapore's malls are owned by Reits like CapitaMall Trust, Starhill Global Reit and Frasers Centrepoint Trust. All three Reits reported increases in net property income. One Reit saw this rise by as much as 17 per cent for the current quarter.

Perhaps more interesting is that some are still increasing rents when leases come up for renewal.
According to filings by CapitaMall Trust, rents were increased by 6.8 per cent at both Plaza Singapura and Junction 8 compared to preceding rents.

Being publicly listed entities, Reit managers are probably more constrained when it comes to offering rental rebates. However, if the retail industry is doing as badly as numbers show, the Reit managers may have no choice.

As FJB's Mr Benjamin said: 'It's better to lower rents than not have a tenant.'

Source: Business Times, 18 May 2009

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