Retail sector expected to hold up in 2010

Source : Business Times – 17 Dec 2009

Analysts forecast a smaller drop in prime retail rents by end-2009

The retail sector – the most resilient segment of the local property market in 2009 – should hold up in 2010 as well.

Most analysts expect prime retail rents to end 2009 down 3-6 per cent – a much smaller drop than they predicted a year ago. A poll of property analysts in late 2008 showed prime retail rents were expected to fall 5 to 13 per cent this year.

Now, heading into 2010, the retail sector is again expected to put up a strong showing, even as rents in sub-sectors such as offices take a further beating.

Prime retail rents are expected to stay flat for the most part, though some analysts are predicting rises of up to 10 per cent.

Rents at suburban malls, on the other hand, are expected to climb, as consumer spending at these malls is thought to be more resilient.

‘Prime retail rents in Orchard Road and Scotts Road and other city areas are likely to drift, with little change, due to more supply,’ said Anna Lee, DTZ’s associate director for retail. ‘Suburban rents may pick up.’

‘There is still healthy demand from local residents and this in turn draws potential tenants and helps stabilise suburban retail rents.’

Cushman & Wakefield Singapore’s director of research Ang Choon Beng agrees prime rents should stay firm in 2010. He is also more bullish than most analysts, predicting a 5 to 10 per cent increase in rents in 2010.

‘We are in agreement with consensus opinion that Singapore’s economy will grow strongly in 2010,’ he said.

‘This will lead to renewed confidence among retailers, keeping prime retail rents firm.’

Retail rents have not fallen sharply this year, despite a large amount of space coming on stream, because consumer spending has been resilient, says OCBC Investment Research analyst Foo Sze Ming.

An estimated 2 million sq ft of new retail space was completed in 2009. And it is expected that another 2.1 to 2.3 million sq ft will be added next year.

But mall operators will be heartened that new supply in 2009 was well-absorbed by the market, and that occupancy rates at new retail malls have been strong.

For instance, Ion Orchard and Orchard Central have achieved respective occupancy rates of 96 per cent and 80-plus per cent. Other new malls, including Tampines 1, Iluma and City Square Mall, have also put up decent showings.

‘While the upcoming supply of new space seems high, an oversupply situation is unlikely as we believe that these spaces can be absorbed by the market,’ said OCBC’s Mr Foo. ‘Some upcoming malls have already secured strong pre-commitments from tenants, well ahead of completion.’

He cited Nex and Marina Bay Link Mall, which have already secured respective lease commitments for more than 70 and 55 per cent of their space.

Analysts reckon retail yields are likely to well supported in the future.

‘They have ranged between 5 and 6.5 per cent over the past 10 years and are now closer to the 5-5.8 per cent range,’ said DBS Group Research analysts Lock Mun Yee and Derek Tan.

‘With limited supply and a robust outlook, we anticipate retail property yields to hover within a tight range.’

And capital values are expected to be stable in 2010. According to URA statistics, retail capital values fell 1.2 per cent quarter-on-quarter in Q3 2009, taking the drop from the peak to 12 per cent.

The decline has been greater for centrally located properties, with values down 12 per cent, versus an 11 per cent dip in fringe areas.

‘We expect capital values will be stable because most retail properties are held by big developers and Reits (real estate investment trusts,’ said DTZ’s Ms Lee.