Retail rents expected to drop by 4 to 14% in 2020, but new tenants not likely to rush in

Retail rents expected to drop by 4 to 14% in 2020, but new tenants not likely to rush in

With the retail sector one of the hardest hit by the Covid-19 pandemic, property analysts are expecting retail rents to decline by between 4 and 14 per cent for the whole of 2020.

Despite the drop in rents, they do not expect retailers to take up vacant lots, especially in prime shopping malls in the central region.

Analysts expect rents in prime malls in areas such as Orchard Road to drop by between 10 and 14 per cent for the whole of 2020, while rents at suburban malls are projected to fall at a lower rate of around 4 to 5 per cent.
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They say suburban malls are likely to be more resilient during a downturn as they tend to sell more essential items.

With business closures set to rise as the Covid-19 pandemic drags on, analysts also expect the vacancy rate to rise, with ERA’s head of research and consultancy Nicholas Mak expecting the vacancy rate to hit between 9 and 10 per cent for the whole year.

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According to real estate statistics from the Urban Redevelopment Authority, rental prices for retail went down by 2.3 per cent in the first quarter, while the vacancy rate increased by 0.5 percentage points and is now at 8 per cent.

Mr Mak said the last time retail rents fell by double digits for the whole year was in 1998, when Singapore was reeling from the worst of the 1997 Asian Financial Crisis. It fell by 18.6 per cent in 1998.

While official data for the second quarter is not available yet, property consultancy Cushman and Wakefield said in a report on Thursday that prime retail rents have fallen in various locations across the island, with those in the city area, excluding Orchard, falling the most at 3.5 per cent compared to the previous quarter.

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“Currently, many landlords are still holding onto near pre-Covid asking rents, but as vacancies increase, landlords are expected to become more flexible,” said Ms Christine Li, the head of research for Singapore and Southeast Asia at Cushman and Wakefield, who authored the report.

Mr Desmond Sim, head of research for Singapore and Southeast Asia at property consultancy CBRE, also said that reducing rents would usually be the landlords’ last resort.

Landlords would instead help their tenants out through cash rebates, such as offsetting marketing or operational expenses tenants usually have to pay on top of rent.

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“Rental rates are usually contractually bound for three years, so rental erosion would take longer to claw back,” said Mr Sim.

However, to attract new tenants, landlords will have to offer attractive rents, he added.

Mr Justin Tang, head of Asian research at United First Partners, said that the second quarter figures may just be marginally worse than the first quarter even though two months of the circuit breaker — April and May — fall squarely within that period.

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That is because tenants who decide to end their leases would usually have to serve a three-month notice period, during which they are still recorded as paying rent.

In addition, Government subsidies as well rental waivers may delay the eventual closures of some tenants.

Hence, he expects the official data to reflect the real ground situation only in the second half of the year.

Analysts were, however, mixed on whether dropping rents would be enough to bring in fresh tenants.

Mr Tang believes that Covid-19 may have probably changed the face of retail in Singapore given that many retailers were forced to go online.

“What Amazon didn’t kill off, Covid-19 probably did,” he said.

Mr Sim, however, believes that physical malls are still relevant as online shopping comes with long wait times when items are shipped from overseas.

Mr Mak said some malls, especially those owned by real estate investment trusts, may have a certain strategy as to the type of tenant mix they are looking for.

“It doesn’t mean they will grab the first tenant that comes along. Some vacancy units may take longer to fill up as the mall owner is concerned about longer-term impact,” he said.

Source: Today – 19 Jul 2020

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