Retailers likely to be cautious in expansion, rents may undergo corrections to reflect the gloomy outlook
RENTS for prime retail space in Orchard Road could fall by as much as 13 per cent in 2009, while rentals at suburban malls are expected to ease by about 3 per cent, property analysts here said.
Cuts in consumer spending will be the key threat to rental rates. But rents will also come under pressure from the 3.2 million square feet of new retail space expected to come onstream next year - close to half of which will be along Orchard Road.
A poll of property analysts here showed that they expect prime retail rents to fall by anywhere between 5 and 13 per cent next year. But malls in the suburbs, where people go to buy their neccessities, are expected to fare better. Predictions for suburban rental growth range from ‘holding steady’ to a decline of up to 7 per cent. The consensus view is a fall of about 3 per cent.
By contrast, so far in 2008, prime Orchard Road rents fell 0.8 per cent year-on-year, while prime suburban rents rose one per cent, data from CB Richard Ellis (CBRE) shows.
Consumers are expected to cut back on spending on concerns of job and wage security, which will hit the sales of retailers, analysts said. Tourist arrivals are also expected to fall, which will depress sales further.
‘A prolonged depression in consumer spending could affect retailers’ ability to service their rents and we think it is possible that more retailers would renegotiate for lower rental rates, and retail mall managers may have to give in to avoid a high turnover in tenants,’ noted OCBC Investment Research analysts Foo Sze Ming and Meenal Kumar in a report.
Echoed Knight Frank: ‘Retailers will be more cautious in expanding their businesses and retail rents are likely to undergo corrections to reflect the gloomy outlook.’
In addition, more space is due to come onstream - some 5.7 million sq ft in the next two years. Of this, 20-30 per cent will be located along the Orchard Road belt. Another 21 per cent will come from the Marina Bay Sands resort. Some of the major retail supply due to be completed next year include Ion Orchard, The Marina Bay Sands Shoppes, Orchard Central, 313@Somerset and City Square Mall.
But in spite of all the new space, analysts here remain confident that the healthy take-up of retail space seen so far is likely to keep vacancy rates under control and prevent sharp rental declines caused by oversupply.
Most of the major upcoming malls - such as Ion Orchard, Orchard Central, Mandarin Gallery, 313@Somerset and Marina Bay Shoppes - have reportedly achieved pre-commitment rates of between 50 per cent and 70 per cent, said Colliers’ director for research and advisory Tay Huey Ying. And there should be interest for the remaining retail space, she said. The Orchard Road malls will ‘probably be the only new retail malls the market is likely to see on this prime stretch for a while’ and the Marina Bay Shoppes ’should also be sought after as the locality would be a new icon for Singapore’, Ms Tay said. ‘The challenge, therefore, is really in structuring a rental package that is win-win for both landlord and retailer in an increasingly trying time,’ she added.
Other analysts agreed, saying that the onus will be on landlords in 2009.
‘Prime properties will still be able to attract tenants, but developers must be more flexible with rental expectations,’ said Anna Lee, DTZ’s associate director for retail. ‘As consumers hold their purses tighter, landlords would have to spend more on advertising and promotion to entice more consumer traffic to their malls and translate that into spending.’ And to mitigate lower sales faced by their tenants, some landlords may offer rental rebates and lower turnover rents, she added.
Analysts also said that capital values are expected to remain steady in the retail sector. ‘Of note is that the retail sector remains defensive even during the Asian Crisis period, with rental rates and capital values remaining fairly stable during this period. Hence, we believe that a fair cap rate for the retail sector would remain in the 5-6 per cent range,’ said DBS Group Research analysts Mun Yee Lock and Derek Tan.
Source : Business Times - 27 Dec 2008
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