Thursday, September 24, 2009

Retail market looking good

Some 1.1m sq ft of retail space will be added to Orchard Rd this year, bumping up supply in the prime shopping belt by 24%

THE retail scene appears to be regaining some momentum after a quiet first quarter, thanks in part to the Great Singapore Sale, the opening of Ion Orchard and Orchard Central, and news about the high pre-commitment levels in upcoming malls. With the opening of Orchard Central and Ion Orchard, some 613,548 sq ft of space has been added to private stock along Orchard Road.

This represents a 15.7 per cent increase to private Orchard Road stock in Q2 this year. As a result, the occupancy rate for Orchard Road dropped 11.5 percentage points from 95.3 per cent in Q1 2009 to 83.8 per cent in Q2. Average rents in the Orchard Road basket of prime retail space that CBRE tracks saw a 2.9 per cent dip quarter-on-quarter. As at H1 2009, prime Orchard Road rents have fallen 6 per cent.

There is no doubt that retailers are increasingly being challenged by the economic downturn that is driving down tourist numbers and local spending. Coupled with high overhead costs, retailers face the prospect of not being able to achieve their projected turnover. But this is probably a short term view of the situation. Fundamentally, there are factors working in favour of retailers.

Market talk has also been rife with concerns about supply looming in the two new integrated resorts (IRs) and how it would impact rents in Orchard Road and the rest of Singapore. Again, the concern of over-supply may be premature.

Some 1.1 million sq ft of retail space will be added to Orchard Road this year, an increase of 24 per cent to the current 4.5 million sq ft of Orchard Road retail space. Rents will inevitably come under some pressure as a result. But overall, new shopping space in Orchard Road will add a new dimension to the landscape. Shoppers can expect new store formats and fresh labels, giving retail a new look.

Let's not forget that Orchard Road is a must-visit tourist spot. Its recent makeover testifies to the government's commitment to keep it a premier shopping belt. And as a top tourist destination, prime Orchard Road shops will continue to command a premium in terms of rentals. Malls in Resorts World in Sentosa and the Marina Bay Sands will carve out a different niche.

The Marina Bay Shoppes, the retail section of Marina Bay Sands, is made up of 300 shops spread over 800,000 sq ft of retail space. Resorts World, which caters mainly to families and tourists, has about 330,000 sq ft of retail space. Combined, the two IRs would contribute about 42 per cent (1.13 million sq ft) to the 2010 supply pipeline to complement the many conferences and exhibitions that are expected to take place in Singapore.

What is encouraging is that many of the new malls already have high pre-commitment levels; Mandarin Gallery at 93 per cent ahead of completion, 313@Somerset is 90 per cent pre-committed and Knightsbridge 50 per cent pre-committed. This means that the vacancy rates in Orchard Road should move back to the 90 per cent level (from 84 per cent in Q2 2009) within a year, once tenants have moved in and started operations. Recently, Marina Bay Sands announced that 75 per cent of its shops have been leased ahead of completion.

Historically, the take-up for retail space in Singapore has been supply-led. Retailers are typically attracted to take up space at new malls and the market usually finds its equilibrium a year after each peak in supply. Occupancy levels should hover between 80 per cent and the high 70s by 2011.

With local retailers (established as well as new-to-market labels) and foreign brands opening at the new IRs, the market should find its footing around H2 2012. Islandwide occupancy would likely return to a healthy 90 per cent by 2012.

What's more important is that the new supply pipeline essentially pushes developers and landlords to be innovative, to provide some form of differentiation in mall formats in this highly competitive market. Now, more than ever, landlords are able to allot more space to shops to carry new-to-market brands, niche products and services. Start-ups have a chance to grow while local retailers can expand given the ample supply coming on stream.

Mandarin Gallery carries more than 30 new-to-market labels. The Ramp at Orchard Central has 30 shops which can be used as a launch pad for start-ups; some 6,000 sq ft of space at the new Parco@Millenia store will be set aside to showcase works of aspiring home-grown designers. Ngee Ann City is also revamping the former Sparks space into a chic lifestyle cluster that caters to young adults. TripleOne Somerset, the new kid on the block in the Somerset cluster, also promises to be a haven for new-to-market labels.

So far, the new Orchard Road malls have been able to command an average of $20-plus per sq ft per month, which is fairly healthy under the current economic conditions.

We earlier predicted that rents would fall by 15-20 per cent this year. However, we have since revised our forecast to a decline of 10 to 12 per cent for the year. Rental declines should be smaller at 6-8 per cent in 2010.

Several other positive signs point to a recovery in the long term:
  • The government remains focused on achieving a target of 17 million visitors by 2015. Unless the retail landscape transforms to match retail hot spots like Hong Kong and Tokyo, Singapore will be hard pressed to meet the tourist arrival targets. Luxury brands are expanding their presence here in a big way, working towards a high concentration of luxury brands along Orchard Road. Spurred by the slew of budget airlines coming on the market, tourists will continue to find Singapore an attractive destination.
  • Singapore is on track to attract foreign investment, which means expatriates will continue to take up residence here. International schools will see increased enrolments to achieve the target of 150,000 foreign students by 2012.
  • The unemployment rate has stabilised at 3.3 per cent in June, unchanged from a quarter ago, despite the economy contracting 6.5 per cent in the first half of this year. Labour officials are confident that layoffs in Singapore can be kept from the highs of the Asian financial crisis and during the Sars crisis in 2003.
  • A recent MasterCard survey on shopping habits during the Great Singapore Sale showed a one per cent increase in spending compared to 2008; a total of US$37.5 million was spent by MasterCard cardholders in the first weekend of the Great Singapore Sale. It is encouraging that most of the growth came from Singaporean cardholders - a sign that there is sufficient domestic demand to drive sales.
  • Singaporean cardholders spent US$26.3 million in the first weekend, a jump of 7 per cent of receipts compared to last year, while tourists spent US$11.2 million, a dip of 12 per cent. Food and beverage (F&B) remains the top expense item. Retailers have long caught on to F&B as an area of growth. It remains a key segment, with Japanese food halls, quick service food kiosks and eateries proliferating at MRT stations. Informal eateries serving quality cuisine have cropped up in private residential estates. And many new and upcoming malls are tailoring their tenant mix to cater for more F&B outlets. For example, Ion Orchard will house 125 F&B outlets while about 35 per cent of Orchard Central's tenants are F&B outlets.

The writer is director, retail services, CB Richard Ellis 
Source: Business Times, 24 Sep 2009

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