Rent arrears surge as sales plunge

Source : Straits Times - 7 Mar 2009

Rental default cases hit unprecedented level as recession takes its toll

MANY small retailers face an unenviable cash crunch as the recession crimps sales - and this is fast taking a heavy toll.

At the prime mall Far East Plaza, rental default cases are already piling up.

At least five shops at Far East Plaza - out of about 600 - have been repossessed so far this year. The mainly small retailers and start-ups at the mall may be in a weaker financial position to ride out the crisis. — ST PHOTO: LIM SIN THAI

Mr Charles Yue, a shop specialist who focuses on the Scotts Road mall, has already helped landlords repossess five shops since the start of the year, well up from ‘one or two’ for all of last year.

He is now handling an unprecedented number of cases of rental default at any one time - about 20.

This is where the tenant owes up to three months rent. The defaulting tenant must either pay up - or move out.

Far East Plaza is a strata-titled mall, which means it has multiple individual owners rather than one mall owner.

In regular economic times, about 50 cases of rental default crop up at the mall a year, as it attracts many first- timers trying their luck at opening a shop.

But Mr Yue, of Ginza Real Estate, said he has not seen rental default at the current levels.

‘It has become more pronounced as the crisis deepened. After Chinese New Year, retailers experienced a drastic drop in sales,’ he said. ‘This round, more people have cash flow problems. Their sales have dropped and their income is less than their expenses.’

Strata-titled malls are likely to suffer more than single-

owner malls because of a lack of a central lease management to handle vacancies as well as to promote the mall, said Knight Frank deputy managing director Danny Yeo.

Also, they tend to draw small- and medium-sized enterprises and start-ups, which may be in a weaker financial position to ride out the crisis, he said.

A strata title gives an investor ownership of a small piece of a bigger property. Other strata-titled retail properties include Lucky Plaza, Orchard Shopping Centre and Sim Lim Square.

Mr Yue has not handled so many cases of rental default in such a short period. ‘Now, we need to troubleshoot and do rental collection on behalf of the landlords,’ he said.

He said his firm has a regular clientele of more than 100 landlords at Far East Plaza, which has about 600 shops.

Individual landlords are reacting differently: Some are giving rent cuts of 3 per cent because of the government tax rebate, others are giving more. Then, there are those who have yet to do anything.

Some tenants are doing fine. But landlords will have to act if the tenants start defaulting on their rent.

Ms Dee Dee Yue, 46, a supervisor at Bus Stop Apparels in Far East Plaza, said it has no problem paying the rent but sales have dropped by about 40 per cent to 50 per cent from last year.

At another shop in the mall, a salesgirl, who wanted to be known only as Ah Mei, said business was very bad. ‘If we hadn’t signed the contract to stay on, we would have closed shop long ago.’

The situation at Far East Plaza could get worse, said Mr Yue.

Going to court may not be the best solution due to the time and cost involved, he said. ‘If tenants continue to default, it is sensible for the landlord to take back the shop and find another tenant.’

The current climate may attract start-ups keen to enter the market, said Mr Yue.

A 33-year-old landlord, who owns six shop units at Far East Plaza, said the defaults started last December. One of his tenants, a fashion retail start-up, moved out after Chinese New Year, after only several months of operations.

‘If we drag on for a few months, our losses will be higher,’ he said. ‘Compared with other places, Orchard Road rents are high for start-ups. Some of them didn’t expect the downturn to be so serious.’

He plans to cut rents for new leases by about 5 per cent for a start.

Rents at Far East Plaza can range from $20 to $40 per sq ft for fashion stores. For a tiny shop, this would amount to at least several thousand dollars a month.

Things will generally get tougher for retailers in the Orchard Road area after the new malls open, said Mr Yeo.

‘There seems to be more vacancies now as some tenants are not renewing their leases. But it is not alarming.’

It is still early days.

‘If the economy remains the same for the next six to nine months and consumer expenditures continue to dip, you can expect to see more vacancies,’ said Mr Yeo.