Retail Sector Rising, But Rents Could Follow Suit

Source : The Business Times, December 22, 2007

Analysts confident that growth in the segment is sustainable

As far as retail space is concerned, the weakening market sentiment now grabbing the headlines might well belong to another planet. Retail rents are expected to rise next year - especially in prime areas such as Orchard Road - fuelled by strong demand and limited prime space.

Jones Lang LaSalle (JLL) expects rents to rise between 4.5 and 4.8 per cent in the Orchard area, while CB Richard Ellis (CBRE) is forecasting an increase of 4-8 per cent. And rents at suburban malls could go up 2-5 per cent in 2008, says CBRE.

In Q3 2007, the Orchard area achieved about $40 to $41 per square foot (psf) per month, according to JLL. And for the same quarter, retail rents increased 3.3-3.5 per cent year on year.

With occupancy rates around 95-98 per cent in Orchard Road malls, demand is clearly alive and well.

But Pua Seck Guan, CEO of CapitaLand Retail, CapitaMall Trust Management and CapitaLand Financial, is quick to point out that any increase in rent has to be relative to increases in retailers' takings, so as to ensure sustainable growth.

'Sales this year, over last year, are 5-7 per cent higher due to the economy and sales productivity,' he says. 'Customer traffic has seen a 27 per cent increase over the past four to five years. This outweighs the rent increases.'

According to him, rent renewal rates this year are 12 per cent higher than the expired rent, which he deems reasonable owing to GDP growth and rising inflation. 'Moving forward, we expect to see an 8-12 per cent increase over the next two to three years,' he told BT. The leases are generally three years for specialty stores.

While the injection of new retail space next year will help pace retail rents, take-up is expected to increase with the new supply. CBRE puts new supply for 2008 at 2.57 million sq ft, thanks to upcoming shopping malls such as ION Orchard, Orchard Central and West Coast Plaza.

Consumer spending has been on the rise. According to Citibank economist, Zheng Kit Wei, private consumption rose 4.5 per cent in the first three quarters of this year, which is substantially higher than the 2.5 per cent increase last year. Retail sales are expected to remain robust in the high single digits.

'The unemployment rate has fallen to a 10-year low of 1.7 per cent,' says Mr Zheng. 'Wages have risen almost 7 per cent in the first three quarters of the year, nearly double the 3.2 per cent increase last year. This has put more cash into consumers' pockets and given them greater confidence to spend more.'

Mavis Seow, executive director of retail services for CBRE, says retail sales to date this year total $23.8 billion on the back of the hot property market, optimistic economic outlook and steady stream of tourist arrivals.

And with the launch of the Singapore Flyer and the inaugural Formula One night race next year, as well as the upcoming integrated resorts, sales are expected to keep going strong, if not improve, says Chua Yang Liang, head of research (South East Asia) for JLL.

Retailers, too, are expecting cash registers to ring into the New Year, thanks to the festive season and fat bonuses. Tan Yew Kiat, general manager of homegrown fashion label bYSI, is forecasting a sales increase about 25-30 per cent this Christmas.

bYSI, for one, plans to capitalise on the additional supply of space by launching a flagship store when Orchard Turn opens in October next year.

As for shoppers, they can look forward to new concept stores, flagship stores and new entrants to the market. This year has seen a lot of demand from retailers in terms of new brands compared with last year, says CapitaLand's Mr Pua, who cites examples such as Cortefiel as well as new stand-alone stores like Kate Spade and Agnes B.

'Fashion is on its way up, although I think there's still strong growth for jewellery and watches and even healthcare and beauty products,' he reckons. 'This year has been particularly encouraging across the board.'