Why rents are still rising in Singapore’s top malls, even when sales are not

Mall occupancy costs are continuing their upward climb in Singapore, as demand for space from retailers remains strong. Exemplifying this is Singapore CapitaLand’s real estate investment trust (REIT), which operates some of Singapore’s most prestigious retail and mixed-use properties. 

The premier mall operator was back on the investor conference circuit in late August, this time putting some colour into its numbers for the first half. A struggle for sales growth in the island state (indeed, sales have been falling in recent months) has not dampened rental growth, a combination that retailers don’t like much.

But for the time being at least, retailers are taking it on the chin and battling for what’s out there, so it is still tough to get space in the best malls. Retail occupancy in CapitaLand’s portfolio was 99.0 per cent at the end of the first half, which is just about as good as you can get. 

Indeed, several malls in the portfolio have hit 100 per cent. This is not just a consequence of new retailers coming in; tenant retention also continues to improve, with the rate rising to nearly 86 per cent, from 83 per cent last year. One caveat: that number is heavily biased toward the company’s downtown malls that are more exposed to tourism.

Retail space pipeline is below historical average

The squeeze on retailers to find quality retail space is not about to ease, as there is little in the way of new space coming online over the next few years. From this year through 2027 the outlook is for just an additional 100,000sqm, or 25,000 sqm per year, which is a piffling amount considering current demand. It is also a gross figure, so it excludes obsolete space exiting the market. 

Citing CBRE data, CapitaLand reports that in the second quarter, rents increased by nearly 6 per cent, year over year on Orchard Road, Singapore’s most celebrated shopping strip. In the suburbs, rents were up by a slightly more sedate 2.6 per cent. The outlook, therefore, is for rents to go on rising in the short- to medium term, unless the economy implodes. (GDP growth is forecast to be around 2-3 per cent this year which isn’t great but isn’t a recession either.)

CapitaLand’s revenues shrug off tenant sales flop

CapitaLand’s gross revenue from retail assets grew by 3.4 per cent in the second quarter, to S$144.7 million, while the other key metric, net property income, grew by 6.6 per cent, to S$104 million. For integrated (mixed-use) assets with a retail component, gross revenue was up 1.4 per cent, to S$118.9, and net property income grew 4.2 per cent, to S$87.7 million. 

For the first half as a whole, revenue for retail projects was up 2.8 per cent, to S$292.8 million, and net property income was up 6.3 per cent, to S$211.3. For the integrated assets, revenue increased 2.5 per cent, to S$238.7 million, and net property income grew by 4.6 per cent, to S$174.1 million.

Another metric mall analysts like to look at is the lumpiness of the lease expiration schedule. If you have a disproportionately large number of leases expiring in one year, it can signal trouble, since it puts the landlord at the mercy of any market shock that might occur in that year. 

What you like, if you are a mall operator, is a fairly even distribution of expirations. Rather than report the number of actual expirations in the next few years, CapitaLand reports lease expirations weighted by contribution to gross rental revenue, which gives a more useful picture of risk. For CapitaLand, this metric is well spread out for the next few years, with 12-15 per cent of leases turning over each year between next year and 2027.

Speaking of risk, that is also well spread among tenants, with no single retail tenant accounting for more than 2 per cent of rental income. And consistent with the trend in malls toward social rather than transactional uses, nearly 18 per cent of space in CapitaLand’s retail projects are now accounted for by food and beverage tenants. That percentage is likely to rise even further, since food and beverage operators account for the most leasing inquiries for space, followed by health and beauty, and then fashion and accessories.

Now the bad news

For retailers, it hasn’t been that easy in the island state of late, with retail sales growth, excluding motor vehicles, dipping by 2.5 per cent, year over year, in the second quarter (the most recent full-calendar quarter reported by SingStat) and by 3.1 per cent in June.

Ordinary words can carry big meanings and when CapitaLand refers to tenant sales growth rather than rents, it uses the word “stable” growth to characterise the state of things, which in and of itself sounds like hyperbole, when the number is just +0.1 per cent. Indeed, in the first half, sales per square metre, the key metric for the productivity of retail space, went negative in the same downtown malls where incoming rents were up nearly in the double digits. 

Of course, mall operators will argue in this situation that rents were starting at below market rates and were in the process of normalising. And CapitaLand was not apologetic: “Sales grew slightly, year on year, due to the initial boost from the inbound Chinese tourists” went the investor spiel at Citi’s ASEAN Thematics Investor Conference.

Despite the overall lack of progress in terms of sales growth, there were some clear winners. Productivity gains were reported for books, stationery and gifts (8.3 per cent), education (8.0 per cent), leisure and entertainment (4.6 per cent), and supermarkets (4.4 per cent). A few other categories had small gains. But there was some carnage: sporting goods, shoes and bags, department stores, home and living, and fashion, were all battered into negative territory, some of them very deeply.

More broadly, while Singapore retail sales have been floundering in recent months, there are a few bright spots. One of them is a key driver of mall sales and that is food catering, which enjoyed sales growth of almost 20 per cent, year on year, in June. Otherwise, the pickings have been slim: department stores, convenience stores, apparel and footwear, recreational goods and IT all struggling for signs of life amid swooning sales. ‘Stable’ growth indeed.

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