Retail Rents Rise In Q3 But Retail Sales At A High

Source : The Business Times, October 9, 2007

Some shops expand even as rents rise, others more sensitive to psf sales

Rents for shops on Orchard Road may have increased by another 12 per cent in the third quarter to $44.30 per square foot (psf) per month, but retailers are unfazed, especially as the latest figures show that the second quarter of this year saw the strongest sales for 10 years.

According to a report by property consultancy Knight Frank, retail sales value (excluding motor vehicle sales) in the second quarter hit a 10-year high of $8.15 billion.

The figure for the quarter was also an improvement on the previous interim high of $7.8 billion seen in the final quarter of last year.

Not surprisingly then, rising rents in the Orchard Road vicinity as well as the Marina area, where rents increased by 3.7 per cent quarter-on-quarter (q-o-q) to an average $28.90 psf per month, are not upsetting retailers too much.

Knight Frank director (research and consultancy) Nicholas Mak says: 'With the planned revitalisation of the Orchard area, retailers are optimistic that their retail sales figures are able to offset the increase in rentals.'

Knight Frank also expects full year figures to hit a record high, pointing out that at end-July 2007, total sales figures already stand at $18.4 billion compared to $29.5 billion for the full year of 2006.

Nash Benjamin, the CEO of FJ Benjamin, which owns Guess, Gap and Celine here, has noticed that rents have been rising but he says: 'The bottom line is whatever rental you pay must finally be relative to the business, otherwise tenants will not be able to invest. We are fortunate that most malls we work with have a good understanding of this principle.'

With space getting more expensive, retailers are becoming more sensitive to rentals on a per square foot basis too.

Steven Goh, spokesman for the Orchard Road Business Association, believes the situation is not so much that retailers are prepared to pay higher rents for a prime space but more that they have become more savvy in measuring how 'productive' their businesses are.

'For instance, a restaurant that was 2,500 sq ft before may streamline its operations to 2,000 sq ft because it gives the optimum return of $100 worth of sales on a per square foot basis, which can justify the rental,' he explains.

Another example Mr Goh gives is that of fashion boutiques, which on average, must make between $120-$150 psf in sales. And the concern is not so much about rent. 'The pressure is actually to find new concepts,' he says.

Perhaps a sure sign that retailers and their landlords are doing well is when a shop decides to expand, even when rents keep rising.

High-end leather goods retailer Tod's, in the equally high-end mall Paragon, has just moved into bigger and better premises with frontage on Orchard Road, increasing its store size by about 50 per cent.

Patrina Tan, deputy general manager of marketing at Paragon, says it does not discuss rents but does concede that all landlords do see the expiry of an existing lease as an opportunity to review rent levels. 'Rentals are always relative,' she adds.

She also reports that the sentiment among the tenants at Paragon is definitely 'positive'.

The outlook for the future remains good too despite close to 2 million sq ft of retail space scheduled to be completed by next year. And at Knight Frank, Mr Mak says he does not expect demand to decrease either.

For the rest of the year, Knight Frank expects occupancy to increase by about one percentage point q-o-q. This will bring islandwide occupancy to between 93 and 94 per cent and Orchard Road occupancy to about 95.8-96.5 per cent.

Knight Frank also expects rentals for prime retail space to increase 15-20 per cent year on year, with capital values rising by 10-15 per cent.