Retailers, landlords lock horns

Source : Business Times - 5 Mar 2009

HIT by weak sales and high rents, Singapore’s retailers are bleeding - and they want landlords to help them out by cutting rents. But landlords are saying that rent cuts of 20-30 per cent all round - which is what the Singapore Retailers Association (SRA) publicly called for last week - are neither needed nor feasible. Instead, building owners are looking at ways to help tenants with sales. ‘Rent is always a function of sales. Therefore, the most scientific way to look at sustainable rent for each trade is to look at each retailer’s occupancy cost,’ said Lim Beng Chee, chief executive of CapitaLand’s retail arm. CapitaLand, which owns and/or runs 16 malls, is Singapore’s biggest retail landlord.

Typically, landlords calculate occupancy cost as rent divided by gross revenue. For CapitaLand’s retail trust CapitaMall Trust (CMT), the average portfolio occupancy cost was about 16 per cent in 2008. Most tenants’ occupancy costs fall within the 15-18 per cent range, according to CapitaLand.

Frasers Centrepoint, which has seven shopping malls, says it has been meeting tenants to work out solutions based on what their specific or critical needs. ‘Outright rent rebates are not a sustainable option given the tight profit atmosphere that every business is currently operating in,’ said a spokesman.

At the Causeway Point and Anchorpoint malls operated by listed Frasers Centrepoint Trust (FCT), the respective average occupancy cost was 12.7 per cent and 15.7 per cent in 2008. But the average occupancy cost at a mall cannot be applied across the board to all tenants. For instance, a supermarket with a much smaller profit margin will not be healthy within the average range, while other trades - such as accessories, fashion and cosmetics - can afford higher occupancy costs because they have better margins. Most developers, therefore, fix rents on a case-by-case basis.

SRA says retailers’ income has contracted 20-30 per cent in the past few months, but landlords say not all retailers have been hit equally - so they are not willing to drop rents for all tenants. ‘The financial crisis is not hitting all malls equally. Most of our malls are still showing healthy numbers, both in sales, traffic and occupancy costs,’ said Frasers Centrepoint.

Landlords say they monitor tenants’ sales closely and can easily tell when a tenant is in serious trouble. CapitaLand, for example, evaluates tenants’ sales and occupancy costs on a monthly basis - store by store and trade by trade - using a system that captures data at each tenant’s point-of-sales. The data is then uploaded into a central database, often daily. Mr Lim, therefore, is confident that the company will be able to spot tenants that are in real trouble and help them accordingly.

But retailers say landlords can never really understand what is happening on the ground. A spokesman for RSH said: ‘Should landlords be defining what is viable for their tenants? Every tenant has a level of profitability they have to achieve to sustain their business, and that level varies from retailer to retailer. Each label or retail concept works with a margin and cost base, and that varies even for brands within the same category. Would landlords have the knowledge or information on these margins and costs, which is information-privy only to retailers themselves?’

Retailers are also frustrated that landlords still seem to be ‘waiting’ and ‘assessing’ the situation - instead of acting to stop the slide. They say that instead of taking the bold and necessary step of cutting rents, landlords are trying to help tenants manage their occupancy costs in other ways - which, according to them, are not working on the ground.

Frasers Centrepoint, for one, said it has stepped up advertising and promotions (A&P) for its malls. ‘We have increased our expenditure about 10 per cent to focus on more tactical promotions we feel will help increase tenant sales,’ the company said.

Likewise, Mr Lim said CapitaLand has in place a slew of measures it can activate to help its tenants. These include relocation to a higher floor within a mall where rent is cheaper, downsizing store space and to trying to boost gross revenue through promotions such as push sales in atriums.

The last strategy - giving discounts and holding promotions to increase revenue - is already common as retailers try to prop up revenue artificially to pay their rents and improve cash flow. But in the long run, this strategy is not sustainable, tenants say.

‘The formula (rent/gross turnover) is such that retailers have to generate sales even when the market is bad, and many resort to more discounts and more promotions. So even if the turnovers increase, margins fall,’ said Douglas Benjamin, chief executive of retail group FJ Benjamin. ‘Just looking at occupancy costs is not accurate when it comes to measuring the health of a tenant. You have to look at the margins as well.’

And there is no doubt that margins are being hit. FJ Benjamin says that for the industry as a whole, margins are down 20-30 per cent. SRA also said last week that retail margins are now almost negligible - if not negative. Increased A&P expenditure will not help much at a time when the entire market is depressed, one retailer told BT.

And landlords, retailers complain, are not just refusing to cut rents - they are, in fact, looking to increase rents about 20 per cent when the time comes for leases to be renewed. When talks on lease renewal for his Mothercare store at VivoCity began, the mall began by asking for 22 per cent more, Pang Kim Hin, chairman of the baby goods retailer, told BT. His story is just one of many such complaints from tenants in recent weeks.

Landlords maintain that they are only asking for the kind of rent increases that tenants can afford to pay. In 2008, Frasers Centrepoint renewed 27 leases at rents that were on average 17.5 per cent higher than preceding rates. And CMT said 363 new and renewed leases were signed in 2008, at rents 9.3 per cent higher than than preceding rates. Typically, preceding rental rates were committed about three years ago. Many landlords, which are listed companies, also point out that retail rents are their only sources of income. CMT, for example, reported gross revenue of $511 million in 2008. If the retailer were to cut rents 30 per cent across the board, revenue could fall by an estimated $153 million. This means that the trust’s distributable income, which was $238 million in 2008, could fall to just $85 million - something that is sure to upset the trust’s international institutional investors.

The same applies for other Singapore-listed retail trusts such as FCT and Suntec Reit. Cutting rents and, consequently, distributions by significant amounts is akin to sending a signal to international investors that Singapore’s economy is in dire straits, a reit manager said.

Frasers Centrepoint explained: ‘As with any business in this economic climate, we are also subject to a similar predicament. The costs of doing business has affected landlords as well, with borrowing costs having increased substantially.’

In light of all this, some landlords say not all businesses can or should be saved during a downturn. ‘In cases where the tenants have over-expanded or if their business model or product is not sustainable, the most logical and win-win solution for us is to facilitate an amicable way to pre-terminate the leases to prevent further losses to the tenants,’ said CapitaLand’s Mr Lim, adding that the developer takes this approach during good times and bad.

Source : Business Times - 5 Mar 2009

Posted in General, Office / Retail Space, Rental | Tagged: Rental Rebates, Retail Rental, Singapore Retail | No Comments »

Paragon facade gets $45m facelift

Posted by luxuryasiahome on March 5, 2009

SHOPPING mall Paragon is sporting a new look after a $45 million project to revamp its facade.

It now boasts an eye-catching three-dimensional look that makes use of multiple pop-out glass panels combined with multi-faceted aluminium panels.

The design, by DP Architects, means higher and bolder shopfronts for designer outlets such as Salvatore Ferragamo, Prada, Tod’s, Miu Miu and Gucci.

‘The design was partly prompted by luxury retailers looking for space to expand and an opportunity to do something different,’ says Paragon general manager Linda Kwan. ‘The new facade provides these tenants with significant visibility and brand expression.’

The revamp is also in line with the Urban Redevelopment Authority’s push to add more colour to Orchard Road by encouraging building owners to develop unique facades.

Besides the new facade, consumers can expect additions to Paragon’s array of international luxury goods. For instance, Jimmy Choo and Coach are set to open flagship stores in May and November this year respectively.

‘With the facelift, Paragon has secured stronger positioning as an upscale shopping mall with its diverse mix of international brands appealing to the discerning fashionista,’ says Mrs Kwan.

Besides these changes, Paragon has expanded the commercial space above its retail podium by 29,000 square feet to accommodate medical and fitness facilities.

The mall has also participated in the Customer Centric Initiative programme - a project led by Spring Singapore - to ensure that its standard of service lives up to its classy exterior.