2020 second quarter vacancies to put pressure on retail rents

2020 second quarter vacancies from many activity-based tenants to put pressure on retail rents

Although most retail businesses in Singapore have resumed operations since 19th June 2020, social distancing measures remain in place after a two-month circuit breaker. Many activity-based tenants such as F&B and health & wellness will not be able to operate at full capacity, which could lead to many businesses shuttering for good. As a result, 2020 second quarter vacancies in non-prime locations are expected to rise in the second half of 2020.

Prime retail rents fell across the board in the second quarter of 2020, with Other City Areas rents ($20.88 psf/mo) falling the most at -3.5 per cent quarter-on-quarter. Orchard ($34.73 psf/mo) and Suburban ($31.56 psf/mo) prime rents fell -1.5 per cent and -0.9 per cent quarter-on-quarter respectively.

2020 second quarter vacancies suggests retail market may see steeper falls

Christine Li, Cushman & Wakefield‘s Head of Research for Singapore and Southeast Asia said “The entire retail market may see steeper falls in rent in H2 2020 due to higher expected vacancies, lower footfalls, social distancing measures and economic uncertainties due to Covid-19. Currently, many landlords are still maintaining close to pre-Covid asking rents, but as vacancies rise, landlords are expected to become more flexible. However, for popular prime spaces in sought-after suburban malls which are able to maintain high occupancy levels due to their strong tenant profile, rents will be less affected.”

For the whole of 2020, Cushman & Wakefield expects prime rents in Orchard and Other City Area to fall by about 10 per cent each and suburban prime rents to fall by five per cent.

During the quarter, indoor family attraction Kidzania Singapore announced its closure, four years after operating on Sentosa Island. Popular German-themed Starker Bistro closed all seven of its outlets in Singapore during the quarter too. The market expects more vacant spaces in non-prime locations coming into the market in the second half of 2020 as activity-based tenants are usually located in non-prime spaces within the mall due to their larger size requirements. Furthermore, there could be an overall fall in new demand for retail spaces as some F&B tenants explore delivery options such as cloud kitchens or central kitchens due to current social distancing measures.

Esprit reportedly closed 12 outlets island-wide. It has also been reported that Robinsons will close its Jem outlet in August this year. DFS closed its store at Changi Airport’s 4 terminals, making way for another operator Lotte to take over. Isetan will not renew its lease at Westgate. Nevertheless, some mall operators are able to re-invent space to secure some interesting replacement tenants. JEM was able to re-configure its layout to accommodate IKEA’s first concept store, which will replace the space left by Robinsons. The concept store will open next year.

2020 second quarter vacancies in prime areas may suggest that suburban prime options may become appealing

Mark Lampard, Executive Director, Regional Tenant Representation, said “There is some opportunity for retailers to pursue prime retail spaces during this time as vacancies rise; alternatively, they could also explore suburban prime options for more stability. What is very clear is that retailers have the opportunity to sharpen their e-commerce channels including virtual live sales, given that it is a major mode of transacting business now”.

Ms Tricia Song, Head of Research for Singapore at Colliers International, had earlier said that 2020 second quarter vacancies suggested that it is unlikely that rents will rebound this year.

She said that the retail industry is one of the hardest hit sectors by COVID-19 pandemic and that the data of 2020 second quarter vacancies suggested that rents will be laggard in the next few quarters.

“Retail sales (excluding motor vehicles) plummeted 45.2% YOY in May following a 32.8% YOY decline in April, reflecting the biggest drop in history since 1986 (data unavailable before 1985), as COVID-19 lockdowns shuttered malls.

While retail sales are likely to see a short term rebound as malls reopened on 19 June (phase 2 easing), we believe recovery of the overall retail market is likely to be slow, with no inbound tourist spending in the near term, and structural challenges such as increasing competition from e-commerce, as well as high occupancy costs.

As such, we expect average retail rents to decline 5% or more in 2020 and stay flat in 2021 despite limited new supply. That said, we are heartened that the government has put in place several support measures to prevent catastrophic consequences, including property tax rebates for landlords that are to be passed down to tenants, cash grants for qualifying small and medium enterprise (SME) tenants, rental waivers for retail tenants of government agencies, deferment of income tax payments, a Job Support Scheme, foreign worker levy waiver/rebate, as well as cash payouts. We believe these measures are necessary for the survival of many retail and F&B outlets.

We find some reprieve in that annual average new supply will remain tight through 2020-2024 at 0.7% of stock (0.5 million sq ft net lettable area) versus past 10-year average of 1.4%. Planned supply is mainly in suburban and fringe areas, where there are well-defined population catchments.”

Latest URA data showed that in H1 2020, both Central Region rents and prices weakened by 5.7% and 4.6% respectively. In Q2 2020, Central Region retail rents and prices showed opposite trends. Retail rents deteriorated further in Q2 2020, dragged by Central Area. Meanwhile, declines in prices have slowed, helped by more subdued declines in Central Area.

In Q2 2020, Central Region rents declined further by 3.5% QOQ, after rents fell 2.3% QOQ in Q1 2020. This brings H1 2020 rents to a decline of 5.7%. The Q2 rent decline was led by Central Area rents which contracted by 4.9% QOQ, worse than the 1.5% QOQ decline seen in Q1 2020.

Fringe Area rents showed an opposite trend this quarter, with an increase of 0.1% QOQ, a stark improvement from last quarter’s 5.1% QOQ decline.