Fragile retail market braces for near-term risks amid Covid-19 outbreak

Coronavirus outbreak poses near-term risk to still fragile retail market; industrial property sector braves economic headwinds

• Rents are bottoming and supply pipeline is easing but fragile retail market remains vulnerable
• Despite fragile retail market, retail property investment sales hit 10-year high in 2019 at SGD4.1 billion
• Warehouse and factory rents remained under pressure while that of business parks rose in the second half of 2019
• Industrial property outlook set to be two-tiered, with business parks and higher specification buildings outperforming older industrial facilities

Colliers International on Feb 13 published two research reports which examine the market performance of the fragile retail market and industrial property sector in the second half of 2019 (H2 2019) and its projections for both sectors in 2020.

Colliers Research notes that both the retail and industrial property markets showed signs of bottoming and will likely continue to stabilise into 2020. However, downside risks persist, and any recovery will likely be marginal, particularly for the retail property market which remains vulnerable.

Fragile Retail Market

Based on Colliers’ research, ground-floor rents on Orchard Road inched up by 0.1% half-on-half (HOH) in H2 2019 to SGD40.65 per square foot per month (psf pm), while that of Regional Centres remained flat at SGD33.60 psf pm. For the full-year 2019, rents fell 1.3% year-on-year (YOY) for Orchard and stayed flat for Regional Centres.

Ms Tricia Song, Head of Research for Singapore at Colliers International, said, “We expect rents to stabilise and recover gradually as new supply pipeline eases over 2020-2024. Nonetheless, retail sales remain fragile. Excluding motor vehicles, the retail sales declined 1.2% in 2019. In the near-term, the outbreak of coronavirus (COVID-19) could dampen consumer sentiment and delay a recovery. The situation is evolving, and no one really knows how this will turn out at this point; the outbreak could be the proverbial black swan that will hurt the retail sector.”

That said, retail tenants typically sign two-year leases where rents are locked in during the period, hence rents do not necessarily mirror retail sales volatility. In the longer term, barring a protracted downturn, Colliers Research believes Orchard Road prime rents are likely to lead a gradual recovery with potential boost from Orchard Road rejuvenation plans, as well as a recovery in visitor arrivals and tourism receipts.

Despite large completions in 2019, island-wide retail vacancy improved to 7.5% as of end-2019, (-1 ppt YOY, -0.2 ppt HOH), driven by higher net absorption which is likely boosted by the good take-up at Jewel at Changi Airport and Funan in H1 2019, and Paya Lebar Quarter Mall in H2 2019. As the market continues to digest the major supply completions in 2019, we expect new supply to ease significantly and stay tight in 2020 (0.3% of total stock versus 10-year historical average of 1.4%) and throughout 2020-2024 (0.5% of total stock).

In H2 2019, investment volumes contracted 6.7% HOH on a high base. Nonetheless, overall retail property transaction volumes hit a decade high in 2019, surging 204% YOY to reach SGD4.1 billion. This was driven by keen investor interest and mergers and acquisitions. Major transactions in 2019 included The Star Vista, Duo Galleria and Liang Court in H2 2019, and Chinatown Point and Rivervale Mall in H1 2019. Meanwhile, 313 Somerset was injected into newly-listed Lendlease Global Commercial REIT, while the merger of OUE Hospitality Trust and OUE Commercial Trust priced Mandarin Gallery at SGD3,908 psf.

Ms. Song added, “Over the next few years, the market remains conducive for deals given a favorable interest rate outlook, limited new supply and bottoming rents. After years of consolidation, test-bedding new concepts, recalibrating tenant-mixes, and rental adjustments, we observed that landlords and tenants appear to be more confident about tackling challenges arising from e-commerce by embracing omni-channel retail strategy and driving innovation. In addition, new brand openings, F&B expansions and the entry of flexible workspace players into retail malls helped to support occupancies.”

INDUSTRIAL

Singapore’s industrial property market continued to navigate the economic headwinds, remaining soft in H2 2019, particularly in the warehouse and factory space segments. Based on Colliers’ data, average monthly gross rents of factories fell by about 1.8% YOY to SGD1.67 psf pm as at the end of 2019. Meanwhile, warehouse and logistics rents eased by 1.6% YOY from SGD1.25 psf pm to SGD1.23 psf pm at end-2019.

In contrast, rents at business parks climbed by nearly 1.4% YOY from SGD4.31 psf pm at the end of 2018 to SGD4.37 psf pm at the end of last year. Rents of independent high-spec space, meanwhile, increased by about 1.4% YOY to 2.94 psf pm over the same period.

Dominic Peters, Senior Director of Industrial Services at Colliers International, said, “The COVID-19 outbreak could hit manufacturers with disruption to the global supply chain in the near-term. Coupled with ample new stock, factory rents would likely remain under pressure. In general, we forecast continued two-tier performance between older lower-specifications and newer higher-specifications facilities. Centrally-located business parks and high-spec buildings with good amenities should continue to attract healthy demand while those older and further away from MRT stations or in suburban areas could face more pressure.”

Overall, Colliers Research expects business park and high-spec rents to see slight upticks in the coming quarters. Even within business parks, the performance is likely to be two-tiered with the newer ones in the city fringe likely to see healthier demand than the older ones.

Industrial rents for multi-user factories and single-user factories would likely moderate amid the greater supply in 2020. Warehouse rent should remain soft in 2020-2021 amidst global trade uncertainties before recovering from 2022 as supply diminishes. Location and supporting infrastructure could also be differentiating factors for specialised industries such as food factories and data centres.

In terms of vacancies, Colliers Research noted that the overall industrial vacancy rate could edge up in 2020 as net demand lags net supply. Vacancies should decrease from 2021 onwards as demand improves. According to JTC’s data, total net new supply of industrial space is expected to more than double YOY in 2020 to 20.2 million sq ft, or about 4% of total stock, before coming off in 2021. Meanwhile, business park supply is set to intensify from 2023.

Colliers Research expects capital values of prime industrial properties with freehold or long land tenures of 60 years and above to see marginal uptick in the next few years due to their scarcity. While the interest in government’s industrial land sales in 2019 has been subdued, Colliers Research anticipates stronger investment demand for high-spec industrial spaces in 2020. Net yields for industrial properties with short leaseholds of 30 years and below remained flat throughout 2019 at 5.75–6.25% and Colliers Research estimates that this stable trend should hold over the next five years.