Landlords getting more creative in retail rental structures: industry watchers

Retail landlords are turning to more creative ways to charge rent amid the current downturn and market watchers are also expecting changes in rental structures.

This is due to factors such as the increased presence of institutional landlords.

The economic slowdown is also expected to lead to falls in retail rentals by up to 20 per cent by the end of the year.

An expected glut in retail space, especially in the Orchard Road shopping belt, is expected to see Singapore retail rents falling and this could continue into next year.

A survey among market watchers said the falls could range between two and 20 per cent.

Colin Tan, director, Head of Research & Consultancy, Chesterton Suntec International, said: “It’s probably three to five times more than what we usually get in a normal year, given this huge supply it’s inevitably that rents have to come down, probably in the range of 15 to 20 per cent this year.

“If rents drop by 15 to 20 per cent, then probably it will carry on along the same margin maybe. But if rents were to drop a lot sharper, than probably next year the adjustment will be much less.”

Market watchers said landlords have been getting more creative to help tenants cope with the downturn.

For example, Far East Organisation launched a programme that allows some tenants to pay for space with preference shares in lieu of regular rents.

Observers said it’s also increasingly common for rental structure to be made up partially by base rent and partially by turnover.

This has been largely due to the increasing presence of institutional landlords and real estate investment trusts which favour such structures.

Landlords have also been revising their tenant mix and reconfiguring their shop spaces.

Dr Chua Yang Liang, head of Research, Southeast Asia, Jones Lang Lasalle, said: “Going by real estate fundamentals, when you carve out a space into smaller areas, so bite-sized shops, the rents per square foot will be much higher than a larger floor plate.

“So one way is to segment it into smaller footprints. At the same time, it appeals more to emerging retailers, more exciting shop fronts and attracts more pedestrians to browse.”

Industry watchers expect rentals on Orchard Road to pick up in tandem with a rebound in tourist numbers.

According to Property consultancy CB Richard Ellis, Orchard Road rents averaged S$33.90 per square foot in the second quarter.

This is down 7.8 per cent year-on-year. For the first half of this year, prime Orchard Road rents fell by six per cent.

And a turnaround could take place by the end of next year along with a recovery in the global economy.

Source : Channel NewsAsia – 18 Aug 2009

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