Sunday, March 29, 2009

BTO: Sharper retail rent slide in the offing

Business Times - 21 Mar 2009

Sharper retail rent slide in the offing

Landords' priority now is to retain tenants as they feel impact of slowdown, say analysts. By Uma Shankari


PRIME Orchard Road rents could fall about 15-20 per cent this year, says a new report by CB Richard Ellis (CBRE).


Property analysts have cut their retail rental forecasts in the past two or three months. CBRE, for example, said in December last year that prime Orchard Road rents could contract 5-10 per cent in the first half of 2009. The new prediction comes after they shrank 3.3 per cent in the first quarter - to $34.90 per square foot per month (psf pm).


CBRE has also trimmed its rental forecast for suburban malls. It now expects these rents to fall 10-15 per cent in 2009. In December 2008, it expected them to fall just 2-3 per cent in the first half of this year.


Suburban malls are thought to be relatively resilient compared with their Orchard Road counterparts because of their ready catchment populations, steady demand for basic goods and less competition from new supply. But CBRE's data shows prime suburban rents fell 2.4 per cent in Q1 2009 to an average of $28.30 psf pm.


"Poor consumer sentiment was evident in Q1 as a result of the weakening economy, as well as shrinking tourist arrivals," CBRE says in its report. In 2008, prime Orchard Road rents fell 0.8 per cent, after a 7 per cent climb in 2007. Rents at suburban malls, on the other hand, rose one per cent in 2008 before starting to slip in Q1 this year.


Other firms have likewise cut their retail rental forecasts for this year. In a March 18 report, DBS Group Research re-worked its assumptions for the physical property market after its economists downgraded Singapore's 2009 GDP forecast to an unprecedented -4.8 per cent.


Given this, analyst DBS Adrian Chua now reckons retail rents could fall 10-20 from peak to trough. His previous forecast was a 10 per cent contraction. Likewise, he now believes the vacancy rate for retail space could hit 15 per cent, while earlier he was looking at a maximum of 10 per cent.


But others are keeping their forecasts intact - for the moment. Knight Frank, for one, told BT yesterday it is keeping its retail rental forecasts steady. The firm believes retail rents are likely to shrink 8-12 per cent in the next 12 months to end-Q1 2010.


Leases signed this year are likely to involve lower rents and fewer pre-commitments, said Nicholas Mak, director of research and consultancy at Knight Frank. "Many of the leases signed in 2008 were before the financial meltdown in September that year," he noted. "Retailers have since re-assessed their operations. And this will affect their considerations for leasing new retail space in 2009."


In Q1 2009, some retailers put expansion plans on hold, Mr Mak said. "As market rents declined during the quarter, the asking prices of some major landlords were behind the curve," he explained. "Retailers who were still seeking new premises were offering to pay lower rents than landlords expected. As a result of this mismatch, the number of leasing deals decreased."


Analysts say that for now, landlords have made tenant retention a priority as retailers feel the impact of the weakening economy. "As tenant retention becomes increasingly critical to shopping malls, more landlords are likely to initiate rental incentives or re-package rental structures," CBRE says.


On a positive note, the firm's director for retail services, Letty Lee, says that despite the poor economy, Orchard Road will be transformed this year with the completion of the three new malls, revitalising Singapore's main shopping belt.


"The new malls - Orchard Central, Ion Orchard and 313@Somerset - will introduce a slew of new retail brands and shopping concepts, providing a greater variety of products, F&B and lifestyle choices in the evolving retail landscape," Ms Lee said.

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