Decline in retail rents accelerates in Q3

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AS ECONOMIC headwinds prevail, rentals of retail space in Singapore’s central region fell 4.5 per cent quarter-on-quarter to a new low in Q3, taking the decline to 10 per cent for the first nine months of the year.

In the second quarter, rents had pulled back by 3.5 per cent.

CBRE Research believes the decline in Q3 was led by secondary spaces and corridors, noting that the retail market remains two-tier. Desmond Sim, head of research for CBRE (South-east Asia), said: “In addition, rentals for malls in the City Hall/ Marina Centre, Orchard and Downtown Core locations are likely to be more affected, owing to lower footfall in the absence of tourists and office workers.”

The year-to-date decline in retail rents could have been more severe, he added, but was likely offset by tenant support and government measures.

On the other hand, the latest data released by the Urban Redevelopment Authority (URA) on Friday also showed that prices of retail space in the central region rose by 2.2 per cent in Q3 2020, after chalking up a 1.5 per cent decrease in the previous quarter. JLL’s head of research and consultancy, Tay Huey Ying, said: “This underscores the market’s confidence in the recovery of Singapore’s retail industry post-Covid-19.”

Islandwide, as at the end of the third quarter, there was a total supply of 428,000 square metres (sq m) gross floor area (GFA) of retail space from projects in the pipeline, up from 364,000 sq m GFA in the previous quarter.

The amount of occupied retail space contracted by 50,000 sq m net lettable area (NLA) in Q3, less than the 93,000 sq m drop in the previous quarter.

Meanwhile, the stock of retail space fell by 53,000 sq m NLA in Q3, compared with the increase of 4,000 sq m in Q2.

As a result, the islandwide vacancy rate was flat at 9.6 per cent at the end of Q3. This came as brands such as Topshop and H&M closed their doors at VivoCity and Tampines Mall respectively, while others opened up new stores such as Foot Locker at Orchard Gateway @ Emerald and Decathlon at The Centrepoint, analysts highlighted. Certain malls were also shuttered for refurbishment.

Christine Li, Cushman & Wakefield’s head of research (Singapore and Southeast Asia) reckons that the retail rental market will continue to face a tough operating environment, since social distancing and crowd management measures means lower capacity and reduced footfall. She said: “The gloomy economic outlook will impact discretionary spending by consumers, resulting in weaker retailers downsizing or exiting the market.”

Ongoing border closures also mean that retailers – in particular those on Singapore’s iconic shopping belt, Orchard Road – continue to lose out on the tourist dollar.

On the other hand, Ms Tay pointed out that there is a silver lining for performing businesses, especially those that can take a medium to long-term view – namely, a steep correction in rents and availability of space. She added: “There is potential for rent declines to ease in 2H21 alongside economic growth, restored consumer confidence and easing capacity constraints lifting retail sales.”

Leonard Tay, head of research of Knight Frank Singapore, pointed out that suburban malls are expected to recover faster than those on Orchard Road, owing to the prevalence of employees working from home. He said: “The rental gap between suburban malls and those in Orchard continues to narrow.”

Mr Tay expects overall retail rents will fall 10-15 per cent for this year, while the decline for rents in the suburbs could be capped at 7.5 per cent. He believes the bottom for retail rents could come by year-end or early 2021 as shopper activity picks up. CBRE’s Mr Sim said: “Moving forward, landlords are likely to be more realistic in rental expectations as they attempt to strike a balance between rental and occupancy.”