Singapore Retail Rents Unlikely To Soften

Source : The Business Times, March 27, 2008

But Singapore’s retail operators finding it tough to sustain their businesses, writes SHERENE SNG

SHOPPING seems to be in the psyche of every Singaporean but how will the dynamics in the retail sector - rising rents in particular - reshape our favourite pastime? First, let’s look at the current situation, where retail space has inched up by less than 2 per cent between 2003 and 2007 - from 34.07 million sq ft to 34.64 million sq ft at end-2007.

That has been followed by retail rents around Singapore rising 33.9 per cent in the same period. The island-wide shop space rental index grew from 86.9 in 4Q 2003 to 116.4 in 4Q 2007.

All segments of the retail market saw rental increases. For example, in Orchard Road (central), average monthly gross rental at end-2007 was $45.45 per sq ft per month (psf pm), up from $36.88 psf pm at the beginning of 2005. Average monthly gross rental for suburban areas rose to $28.98 psf pm, up from $26.35 psf pm three years ago.

At these levels, they are still some way behind prime retail rents in Hong Kong ($86.40 psf pm), London ($126.61 psf pm) and New York ($142.77 psf pm).

But prime rents in Kuala Lumpur and Bangkok are lower than in Singapore. The comparisons are made with rents of typical shops in prime retail locations, that is, situated on the ground floor and with good frontage.

What is the impact of rising rentals in shopping malls and how does it impact the shopper?

Retail business cost is largely made up of rent, salaries, training, advertising and promotion (A & P) and for some retailers, backroom support. When rent goes up, and revenue does not rise to a similar extent, retailers will spend less in other areas. Over time, they will cut spending on A & P or training as a way to rein in costs.

For some retailers, especially small and medium-sized companies, profits are reduced to the point that they maintain business for the sake of keeping it going, that is, their shops stay open only as long they can cover costs.

Do retailers feel that they are being squeezed out of the market?

One retailer told me that rents have become too high and many of them are feeling the pinch. If it were not for the fact that he had bought his own shop, things would be hard for him. He felt that many tenants are facing tough times and finding it difficult to sustain their businesses.

It does not help that retailers find it difficult to control other operating costs, including staff salaries and, in the case of food and beverage operators, food costs. In the case of a fashion retailer, staff costs typically make up 10-12 per cent of his sales. This is higher than, say, Hong Kong, where staff costs may range from 8-10 per cent of sales.

By and large, retailers want to be in business for the long term. However, in order to justify investment in business, they need security of tenure. If they are uncertain how long they will be in a particular mall, they would be reluctant to put in a lot of investment. It wouldn’t make sense to train staff and build up a customer base, only to close after three years because of high rents.

All this impacts the consumer. When shopping centres are mainly tenanted to retailers with deep pockets, shopping centres will see a duplication of such tenants and this will result in less variety for shoppers. For retailers that operate on lower margins, for example, electronics, electrical and technology shops, bookshops and large format supermarkets, there is concern that one day they may no longer be found in shopping centres.

To differentiate themselves from the competition, landlords look for new shopping concepts for their malls. Fresh concepts will be a draw, but retailers may be reluctant to bring in new brand names because of the high setup costs involved. Licensees and franchisees have to pay a lot of money for rights to set up new brands in Singapore. High rental costs make retailers think twice about testing new concepts because of the risks involved. One way to get around this would be for landlords to charge such operators lower rent to help them get a foothold in the market. Consumer behaviour is another bugbear of retailers. Singaporeans are viewed as thrifty and with less disposable income. A large number of them enjoy taking budget flights overseas to shop and eat. However, figures from the Singapore Department of Statistics and Knight Frank Research show that retail sales value (excluding motor vehicles) has risen over the last five years to $22.53 billion in 2007. This is an increase of 9.02 per cent from the previous year.

Similar increases for retail sales per square foot of retail space and retail sales per capita have been observed. In 2007, retail sales of $650.50 psf of total retail stock was captured, an increase of 9.57 per cent year-on-year. On a per capita basis, retail sales were $4,814. This means that each square foot of retail space is churning out more sales every year. And each person in Singapore is also generating more sales each year. Along with the yearly increase in tourist arrivals, retails sales will certainly be boosted.

Last year, Singapore successfully secured the rights to host the Formula One race for five years, starting with the inaugural 2008 Formula One SingTel Singapore Grand Prix. This, together with upcoming projects like the two integrated resorts, the rejuvenation of Orchard Road, development of Gardens By The Bay and the Sports Hub will put Singapore on track to achieve the Singapore Tourism Board’s 2015 goal of $30 million in tourism receipts and 17 million visitor arrivals. In 2007, the figures were $13.8 billion and 10.3 visitor arrivals respectively.

Finally, will there be a slowdown in rental increases as retailers hope? Will we face a supply overhang in the next few years?

Between now and 2010, about 6.8 million sq ft of retail space is expected to come on stream. That actually works out to fewer feet of retail space per person than currently: There will be an estimated 6.89 sq ft of retail space per capita of population, down from 7.4 sq ft in 2007.

It appears that the hoped-for softening of rents may not materialise. So what can consumers look forward to? Will they bear the brunt of retailers’ high operating costs should these be passed on to them? That’s the last thing they want.

What shoppers want is to visit malls where the landlord and tenants act together to produce a fresh and vibrant retail mix. Where they can find familiar brands and know that when they come back, these names will still be there. Where shops are well-stocked and sales staff are knowledgeable about the merchandise.

However, retail operators take their lead from their customers. To a certain extent, our shopping habits shape the retail environment. No doubt, Singapore’s market is relatively small but if shoppers send a clear message about the goods and services that they really want and spend their money accordingly, then the spectre of rising rents will not be as disheartening as it appears.

Sherene Sng is head, retail, Knight Frank Pte Ltd.