Research & Forecast Report

Singapore | Retail4Q 2014

Accelerating success.

Retail rental growth remains restrainedIn spite of steady leasing demand, retail rental growth remained restrained in the final three months of 2014 on the back of tepid consumer sentiment amid declining visitor arrivals.

Falling Chinese visitor arrivals derails retail spendingVisitor arrivals to Singapore look unlikely to continue the stellar performances of the past four years where over and above comfortably meeting the Singapore Tourism Board’s (STB) target annually, new records were set in each consecutive year from 2010 to 2013. In contrast, the total visitor arrivals for 2014 might possibly come in below the target of 16.3 million to 16.8 million visitors, or at best, touch the lower end of the projected range. According to the latest statistics from the STB, about 12.6 million tourists visited Singapore from January to October 2014, a decrease of 3.3% over the same 10-month period in 2013.

Deterred by the disappearance of flight MH370, the abduction of Chinese nationals in Sabah, Malaysia, political unrest in Thailand and new tourism laws in China that clamped down on “zero-dollar tours” that come with unexpected fees, Chinese visitors have generally stayed away from South-east Asia, including Singapore.

With the slowdown in Chinese tourists adversely affecting retail sales performance through much of 2014, the retail sales index (excluding motor vehicles) fell year-on-year (YoY) for seven consecutive quarters since February, only to barely climb into positive territory in September.

Source: Singapore Tourism Board/Colliers International Research

Performance of Tourism Industry

Retail Sales Performance (Excluding Motor Vehicles)

Source: Singapore Department of Statistics/Colliers International Research

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Retail sales recorded negative YoY growth of 1.3% in July and 2.4% in August before turning marginally positive in the following two months, with a 0.3% YoY increase in September and a 1.7% YoY improvement in October. The latest retail sales statistics in October show that the discretionary consumer categories of furniture and household equipment shrank by 6.7%, while recreational goods contracted by 6.5% compared to the same period a year ago.

Retail rents on an even keelThe impact of decreasing visitor arrivals on retail sales has been more pronounced in the premier shopping belt of Orchard Road than in the suburban locations of the Regional Centres, as the international and local brands there are more dependent on tourist spending. As a result, the average monthly prime ground floor gross rents in Orchard Road fell by a marginal 0.2% from the preceding quarter’s level, to $36.17 per sq ft in 4Q 2014. In the Regional Centres, the average monthly gross rent of prime space managed to climb slightly by 0.3% on a quarter-on-quarter (QoQ) basis to $33.83 per sq ft in the quarter ending in December 2014, similar to the 0.3% increase in the preceding quarter.

For the whole of 2014, the average monthly gross rent of prime retail space in Orchard Road slipped marginally by 0.8% while that in the Regional Centres edged up by 1.1%. Over the course of the year, prime retail rents throughout Singapore have generally stabilised on a fairly even keel, as the demand for retail space by new start-ups and for expansions is matched by tenants’ resistance to rent increases in a highly competitive market where the challenges of labour shortages and elevated occupation costs prevail.

Over the course of the year, prime retail rents throughout Singapore have generally stabilised… as the demand for retail space by new start-ups and for expansions is matched by tenants’ resistance to rent increases in a highly competitive market where the challenges of labour shortages and elevated occupation costs prevail.

The rental trends in 2014 also continue to indicate that retail activities have gained greater prominence in residential locations islandwide and are no longer as heavily concentrated in the more central Orchard Road locations. The rental premium that prime retail space in Orchard Road commands over similar space in the Regional Centres shrank from 9.0% as of the end of 2013, to 6.9% as of the end of 2014, reflecting the evolving patterns of consumers in Singapore insofar as they relate to location preferences.

Source: Colliers International Research

Average Monthly Gross Rents of Prime Retail Space (by Micro-market)

… the average monthly prime ground floor gross rents in Orchard Road fell by a marginal 0.2% from the preceding quarter’s level, to $36.17 per sq ft in 4Q 2014. In the Regional Centres, the average monthly gross rent of prime space … (climbed) slightly by 0.3% on a QoQ basis to $33.83 per sq ft in the quarter ending in December 2014...

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Demand for retail space is supply-ledMuch of the demand for retail space throughout 2014 as well as in the final quarter of the year has been supply-led. Major retailers target new mall openings as opportunities for expansion into new locations. As such, it is not unusual that most well-located new malls can be almost fully occupied by the time of their scheduled openings.

For example, The Seletar Mall was completed in 4Q 2014 and opened its doors near the end of November. The four-storey shopping mall with two basement levels has more than 130 brands over a net lettable area (NLA) of 188,000 sq ft, and was reported to be 99.6% occupied upon opening. The Seletar Mall’s mix of anchor tenants include supermarket FairPrice Finest, cineplex Shaw Theatres, foodcourt Foodfare, Japanese fast fashion company Uniqlo, ladies-only fitness centre Amore Fitness & Boutique Spa and department store BHG.

Another mall that opened in late November was OneKM in the up-and-coming decentralised commercial hub in Paya Lebar, along Tanjong Katong Road. OneKM was reported to have achieved close to 93.0% of committed leases on its NLA by the time it opened its doors. Among the retail occupiers are Cold Storage and Food Junction as anchor tenants, as well as a mix of international brands like Uniqlo, Esprit and Adidas and niche local brands. Local Chinese restaurant chain, The Paradise Group, opened a “Paradise Dynasty” outlet and two eateries “Para Thai” and “Beauty in The Pot”, with all three being served by a centralised kitchen within the mall. Situated in the former Lion City Hotel and Hollywood Theatre, OneKM has a NLA of more than 200,000 sq ft and more than 150 shops.

Eastpoint Mall in Simei reopened in December after undergoing asset enhancement. Food and beverage (F&B)

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outlets now take up some 30% of the mall’s NLA and include new eateries such as the first-ever Four Leaves Café and first-in-Singapore Juk Story, a rice porridge-inspired Korean concept restaurant. After the refurbishment, Eastpoint Mall has a NLA of 214,161 sq ft.

An atypical retail facility that also began operations during the quarter was the 80,000 sq ft Warehouse Club, located next to Joo Koon Mass Rapid Transit (MRT) station in the west. Developed and operated by supermarket chain, FairPrice, this is a members-only retail warehouse for groceries and household goods. Products at the Warehouse Club are sold in bulk at discounts, modelled after members-only stores, such as Costco in the United States.

Alongside the buzz generated by these new retail complexes, international brands also made inroads into existing malls and retail properties whenever space became available in 4Q 2014. In the Central Business District (CBD), British brand Jack Wills, opened its first store in Singapore at Raffles City Shopping Centre while South Korean beauty brand Etude House, set up its world’s largest flagship store at Wisma Atria at 2,300 sq ft. French jewellery brand Fred, opened its first boutique in South-east Asia at The Shoppes at Marina Bay Sands while sports apparel brand Lululemon, opened a 3,700-sq ft shop at ION Orchard. Another sports label, Under Armour, opened two additional stores, at Collyer Quay in the CBD and Tampines 1 outside the CBD, after opening at Orchard Gateway earlier in the year.

And despite the challenges of an extremely competitive trading environment, the costs and difficulties associated with recruiting skilled staff, new F&B outlets cropped up in all parts of the island with a variety of concepts. Examples of new F&B openings in the CBD include the new 80-seat Mexican restaurant, El Mero Mero at Chijmes. Australian pie company Pie Face, opened its first outlet at 313@Somerset followed by a 1,400 sq ft flagship café at Bugis Village. Outside the CBD, the 80-seat Japanese dessert salon restaurant Henri Charpentier, opened in Dempsey, while Hong Kong dim sum restaurant chain Tim Ho Wan, expanded by opening its sole 24-hour outlet at Lavender Aperia, in Kallang Avenue.

Strata-titled retail property sales continued to be sluggishThe active leasing market stood in stark contrast to the sluggish strata-titled retail sales market in the final quarter of 2014. Preliminary indications showed a total of 64 strata-titled shop transactions in the first 11 weeks of 4Q 2014, representing a 61.4% fall in transaction volume when compared to the 166 caveats registered in 3Q 2014, based on data from the Urban Redevelopment Authority’s Real Estate Information System (REALIS). Primary transactions of purchases made directly from developers stood at 21, or about 32.8% of transactions in the last three months of 2014. These 21 new sales in 4Q 2014 constituted a drop of 81.3% from the 112 primary market transactions recorded in 3Q 2014.

Average Capital Values of Prime Retail Space (by Micro-market)

Source: Colliers International Research

For the whole of 2014, a total of 453 strata-titled retail sales caveats were lodged. This was a mere 39.0% of the 1,163 strata-titled retail sales caveats recorded a year ago – a rather telling indication of how the imposition of the Total Debt Servicing Ratio (TDSR), implemented in June 2013, has dented investment interest in retail units.

Notwithstanding the lower volume of transactions, prices held steady. The average imputed capital value for prime Orchard Road strata-titled retail space remained at $6,942 per sq ft in the final quarter of 2014, unchanged for seven quarters. In the decentralised locations, the average imputed capital value for prime Regional Centre retail space hovered unchanged at $4,491 per sq ft since the beginning of 2014.

The average imputed capital value for prime Orchard Road strata-titled retail space remained unchanged for seven quarters, while the average imputed capital value for prime Regional Centre retail space was unchanged since the beginning of 2014.

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Regional CentresOrchard Road

Retail space in Singapore becoming increasingly diversified

While shopping malls still form the main source of physical space for retailers, F&B outlets and lifestyle service operators, the retail real estate landscape in Singapore is slowly but undeniably changing to become more diversified. There is a growing trend where retail shops and eateries have found a home in niche locations such as shophouse enclaves, beneath HDB blocks in quiet neighbourhoods, in the ancillary retail space of obscure industrial buildings, even operating from remote and private sites removed from the hustle and bustle of urban life. Many of these “hidden gems” are not fazed by the fact that their shop fronts are not located in the middle of heavily trafficked pedestrian flows, but instead rely on the online reach of social media and the internet to draw walk-in customers. Some of these alternative retail options provide an uncommon ethnic atmosphere or relaxed ambience, such as the F&B shophouse locations of Tanjong Pagar,

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Kampong Glam, Jalan Riang and Joo Chiat, while others in non-typical retail space benefit from lower occupation costs when compared to malls. Going forward, such alternatives will feature more in Singapore’s retail landscape alongside the ubiquitous shopping mall.

In addition to the trend of alternative non-mall retail locations becoming increasingly viable options for retailers and F&B operators, much of the real estate dynamics that played out in the retail sector in 2014 is likely to be repeated in 2015. With around 1.2 million sq ft of retail space expected to be completed in 2015, the overall islandwide demand for retail space will continue to be supply-led by the new retail space. Therefore, whenever new shopping malls are completed, the usual slew of eateries and fast fashion stores will populate the tenant-mix alongside a supermarket and food court.

The standstill in retail rents is forecast to continue into 2015

Nonetheless, as the positive interest from retail occupiers to set up shop or expand is expected to be matched by retailers’ resistance to further cost increases in a challenging operating environment, the standstill in retail rents is forecast to continue into 2015. While newly emerging non-mall retail options in varied and diverse locations might be characterised by moderate rent increases, those in traditional malls are likely to continue to experience fairly stable rents in the year ahead. Rental growth for prime ground floor retail space in the Orchard Road district is forecast to range between -1% and 1% in 2015, while that in the Suburban Areas/Regional Centres could plateau at between 0% and 2% in 2015.

Rental growth for prime ground floor retail space in the Orchard Road district is forecast to range between -1% and 1% in 2015, while that in the Suburban Areas/Regional Centres could plateau at between 0% and 2%...

Even though investor demand for strata-titled shops and F&B space (including mixed-use developments) is likely to remain anaemic due to the continued effects of the TDSR and the spectre of rising interest rates in 2015, unit owners are expected to hold onto their price expectations as such units remain rentable. The growth outlook for 2015 appears to be muted with the average capital values of prime strata-titled retail space in both Orchard Road and the Regional Centres expected to remain generally flat for most of the year.

… average capital values of prime strata-titled retail space in both Orchard Road and the Regional Centres are expected to remain generally flat for most of 2015.

Copyright © 2015 Colliers International.

The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

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