Orchard prime rents may fall 20%

Source : Straits Times - 21 Mar 2009

Challenging retail sector is forcing landlords to look at making cuts

IN ORDINARY times, the move to transform Singapore’s premier shopping strip with three glitzy new malls would mean higher rents.

But the latest property industry report suggests that Orchard Road prime rents could fall further - by 15 to 20 per cent - by the end of the year.

The CBRE property report says Orchard Road prime rents could fall by a further 15 to 20 per cent by year-end. — PHOTO: SINGAPORE TOURISM BROAD

A weakening economy, a shift away from luxury goods, and shrinking tourist arrivals spell gloom for hard-pressed retailers with space in the area.

Consultancy CB Richard Ellis (CBRE) says rents will fall as landlords pass on property tax rebates, extend rent-free periods, set lower rent levels for new space, or cut existing rents.

So far this quarter, prime rents have eased 3.3per cent from late last year to an average of $34.90 per sq ft (psf) a month, according to its latest data. The fourth quarter last year saw the first rent fall in the shopping belt in five years.

The retail sector is becoming increasingly challenging as leasing demand is subdued by new mall completions about to offer more retail space in the area.

Already, many retailers are crying out for rent cuts from landlords as they see the economic crisis further undermining already-weak sales.

Aside from the weakening economy, upcoming new malls, such as Ion Orchard (above), are putting additional downward pressure on rentals in the retail sector. — ST PHOTO: NG SOR LUAN

Suburban malls, which experts have said should be more resilient than prime Orchard Road malls, are also feeling the impact of the gloomy climate.

Prime suburban rents slid by a smaller 2.4per cent from the fourth quarter to $28.30 psf per month, said CBRE.

For the whole of this year, they could decline by 10 to 15per cent, it said.

The somewhat smaller expected drop in suburban mall rents reflects their greater resilience to the recession.

They benefit from shoppers living nearby and from steady demand for basic goods. They also face less competition from new malls, said CBRE’s director of retail services, Ms Letty Lee.

‘As tenant retention becomes increasingly critical to shopping malls, more landlords are likely to initiate rental incentives or repackage rental structures.’

Just this week, the Singapore Retailers Association (SRA) intensified its call for rent cuts by getting three other associations on board. They say they are banding together as calls for rental rebates have gone unheeded, and they warn that many retailers will go under if nothing is done soon to bring rent levels in line with the much weaker sales environment.

‘The issue which is most pressing now and which retailers are still very concerned about is existing tenancies with high rental rates which were locked in during the good times, and which are eroding their businesses now, when sales revenues have dropped significantly,’ said the association’s executive director, Ms Lau Chuen Wei yesterday.

‘These are the ones in danger of closure if nothing is done to stem the losses. And closure means job losses.’

SRA had originally hoped landlords would reduce rents to 2005 levels ‘which in many cases would be about 50per cent of current rates’, said Ms Lau.

But she said that tenants are realistic and recognise that ‘this is probably not possible’. With this in mind, SRA has moderated its position to seek an average 20 to 30per cent cut in rents, particularly for existing leases.

Ms Lau added that the industry is not expecting rental rates to be reduced on a long term basis, but rather for, say, six months, as the market is very volatile.

New signings are less of a concern to SRA as these retailers will be more ready to refuse a store location if the rental is not financially viable, said Ms Lau.

Indeed, new malls opening this year have witnessed some tenant pull-outs due to the weak market. This happened at City Square Residences in Kitchener Link, though developer City Developments said the vacant prime space was quickly filled up.