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The vacancy rate in Singapore’s central region hit a five-year high in the first quarter of the year, driven largely by lower take-up rates in Orchard. As the market continues to face a tough business climate, vacant shop spaces have increasingly been creating ghost towns, even downtown.
By Nikki De Guzman
Singapore has become one of the hottest retail destinations in Asia in recent times, housing not only regional brands but also the biggest and most luxurious retailers in its over 100 shopping malls here. Shoppers—locals and tourists alike—are definitely spoilt for choice.
In fact, according to RHB Research Institute Singapore’s report last year, Singapore has the highest concentration of retail space per capita in Southeast Asia at 1.08 sq m or 11.6 sq ft of retail space per capita – just below Hong Kong’s 16.2 sq ft. Meanwhile, Bangkok stands at 8.61 sq ft per capita and Kuala Lumpur is at 7.64 sq ft per individual.
However, with recent economic challenges plaguing both local and overseas economies, Singapore’s retail market has begun to take a hit, and what used to be unheard of in the city-state’s retail scene has become increasingly evident: empty malls in terms of both tenants and shoppers. What happened?
Closing time
Against the backdrop of a challenging operating environment, retailers have increasingly become cost cautious as they begin to feel the pinch of proportionally higher operating costs, manpower constraints and stiff competition from e-commerce.
“The challenges which the retail industry is facing have not spared even the larger establishments,” said property consultancy Savills.
Last year, the Dubai-based Al-Futtaim Group – which operates an expansive portfolio of retail brands in Singapore – shuttered several of its stores, and announced in March this year plans to close about ten more of its remaining 125 stores across Singapore. The group’s portfolio of brands includes Zara, Massimo Dutti and Ted Baker, as well as sports brands Reebok and Lacoste.
Another established retailer, Jay Gee Melwani Group, will also be closing eight stores carrying fashion brands New Look and Celio, said a Savills report.
“The retail environment (in Singapore) continues to be challenging,” said Cushman & Wakefield Director and Head of Research, Christine Li, adding that these challenges affect business sentiments and the consumer confidence in the country.
A walk around the 2.2-kilometre shopping boulevard tells the story: crowds at malls have visibly thinned in tandem with the rise of shop vacancies.
Retail destination no more?
Sure enough, the ones that are taking the hardest hit are those located in the Orchard area—the premier shopping district which had always been vastly reliant on tourist spending and very vulnerable to global economic downturns.
The appeal of Orchard Road has since begun to diminish as tourists shy away from the shopping belt, no thanks in part to the strong Singapore dollar.
“Unlike the suburban malls which are supported by the surrounding residential catchment, malls in the Orchard area generally cater more for tourists and becomes a destination for locals going for luxury brands or for celebration. With a line-up of global uncertainties… the lower retail spending power of consumers impacted these malls in Orchard Road, and this lead to poor performance,” Knight Frank Singapore Executive Director and Head of Retail, Wendy Low said.
In fact, the Mastercard Index of Consumer Confidence for 1H 2016 showed that consumer confidence in Singapore plunged to its lowest level since June 2009.
This was reflected in retail sales within the city-state which remained in the doldrums, dropping by 3.2 percent and 2.3 percent year-on-year in June and July 2016 respectively. In fact, big ticket items such as watches and jewellery, telecom, apparatus and computer segments, posted a significant drop in sales as consumers turned more cautious on their spending.
“Coupled with the high rental pressure that drove tenants to downsize or consolidate their retail shops to minimise further losses, it inevitably led to noticeable vacancies in the area,” Low added.
According to data from the Urban Redevelopment Authority (URA) Real Estate Information System (REALIS), as at the second quarter of 2016, the Orchard Area posted a vacancy rate of 9.2 percent—up from 8.8 percent in Q1. This also drove vacancies at retail malls in the central region to hit a five-year high in the first quarter of the year.
Knight Frank said: “In terms of relative performance against malls in other areas by vacancy rate, (Orchard area) is only behind the Downtown Core which reported 11.7 percent in Q2 of this year.” (refer to Figure 1)
Figure 1: Vacancy Rate of Retail Space, H1 2016
Source: URA, Knight Frank Research
Common sightings
True enough, vacancies at malls in the Orchard area have become a common sighting nowadays.
One example is Shaw Centre. The five-storey shopping centre, which reopened after a 20-month revamp in 2014, has stretches of units on levels three and four still boarded up. A visit to the mall one weekday showed some noticeably empty halls with many units covered up with leasing advertisements.
A staff member from one of the restaurant operators at Shaw Centre who spoke to CommercialGuru on condition of anonymity described day-to-day situations there as “very quiet,” adding that there are “very few shoppers” on the upper leves throughout the day.
Lower levels of Orchard Central, on the other hand, may see more encouraging businesses throughout the day especially with the opening of Japanese retailer Uniqlo’s first flagship store there, but the same may not necessarily apply to the upper floors of the six-storey development.
The mall, which last year embarked on its first major renovation since opening in 2009, still has vast areas of hoardings that often confuse shoppers if stores are operating on the upper levels.
While a number of retailers continue to operate at Orchard Central despite ongoing renovation works, shoppers say the hoardings make it hard to locate some of the stores on the upper levels of the mall.
Allie Wong, an intern at one of the nearby offices, said she often comes to the mall for food options but rarely goes to floors above the second storey as “they seem pretty empty”.
“It is a while since these malls (in Orchard) have started with renovations. I think they should stop being indefinitely under-construction, or boarded up with no end date. It affects the whole shopping experience when you enter a mall, and see a ghost town because they are almost no shops open. It also gives you the impression that the whole mall is under renovation,” she said.
In earlier press statements, it was said that renovations at Orchard Central were scheduled to be completed in Q3 this year.
However, a recent visit to the mall still shows a few units on the upper levels still boarded up. CommercialGuru reached out to the mall’s operator, Far East Organization, for updates on the developments at Orchard Central. However, the group declined to comment on the matter.
Just across from Orchard Central is The Centrepoint, which had also gone through a 16-month makeover. The revamp saw the spaces previously taken up by department store Marks & Spencer on levels one and two vacated, as well as that was previously tenanted by electronics store Harvey Norman on the mall’s third level.
In a recent visit, a portion of the mall’s ground floor remains boarded up, covered with leasing advertisements.
Despite this, mall operator Frasers Centrepoint Malls said The Centrepoint has seen “an encouraging 20 percent boost in traffic since the unveiling of the two new food precincts”.
Trial period
To counter the weaker retail scene, analysts said landlords need to step up their game amid an intensified competition for the spending dollar.
“Broadly, landlords could build up on their efforts in advertisement and promotional activities to hype up the atmosphere of the malls and drive footfalls,” Knight Frank’s Wendy Low said. “Landlords could also revisit the rental structure by being more supportive towards a lower base – higher gross turnover composition to reduce rental pressure on tenants.”
Knight Frank also suggests to “take advantage of the situation to introduce new retail concepts”.
“Landlords hope to provide an experiential shopping experience and also create a point of differentiation in the competitive market with the introduction of new retail concepts,” it added.
After a 16-month renovation, a number of units on the ground level of The Centrepoint in Orchard remain available for leasing.
Frasers Centrepoint Malls Assistant General Manager for Retail Properties, Molly Lim explained that this was a consideration in the mall’s decision to undergo a revamp.
“The recent asset enhancement initiative at The Centrepoint was part of our efforts to continually refresh our mall offerings to better suit today’s changing consumer preferences,” Lim said. “The renovation includes redesigning the shopping experience, beyond the physical stores.”
Aside from the introduction of the food precincts which offer 30 new dining concepts, The Centrepoint also unveiled a new frontage that provides easy access and heightened the visibility of the Food Hall from the street level. The mall’s sixth floor has also been redesigned with a focus on wellness.
“Besides the rising operation costs, there is also competition from e-commerce, (that is why) some of the landlords are injecting lifestyle retail concepts to rejuvenate the retail experience and to excite shoppers,” Cushman & Wakefield’s Li said.
Analysts also reiterated that landlords should perform a critical review of their mall positioning and tenant mixes, in the face of rising competition and pressure from more discerning shoppers.
Further challenges ahead
As if there are not enough problems plaguing the retail market here, analysts warned of further challenges for the retail sector in the near term.
“With signs of waning consumer confidence and muted retail spending, coupled with the stronger Singapore Dollar against regional currencies, retail spending in Orchard Road could be impacted,” Low said. She also warned that the appetite for less prime retail spaces along Orchard Road is likely to reduce, exerting downward pressure on occupancy and rentals in Orchard.
However, while the weak sentiment is expected to linger in the Orchard area, other regions also don’t have much to cheer about. According to Knight Frank, Singapore’s overall retail market is likely to face continual headwinds going forward, with rents moderating further.
The property consultancy expects average rents in the Central Region to fall by 7.5 to 9.5 percent year-on-year by Q4 2016, while the more resilient prime rents are expected to moderate downwards by up to 3.0 percent year-on-year in the same period. “The expected fall in rents takes into account not only the projected weakened demand from retailers, but also the likelihood of landlords re-adjusting the rental structures to help their tenants tide over down cycles of the market in order to maintain healthy occupancy status.”
Based on government data, an estimated 1.072 million sq ft of net lettable retail space is scheduled to be completed in 2016. About 38.2 percent, or some 409,000 sq ft, have already entered the market in the first half of the year.
Knight Frank said: “In addition to this is the cautious stance taken by retailers towards business expansion, and island-wide occupancy is likely to fall from 92.8 percent in Q4 2015 to between 90.0 percent and 92.0 percent in Q4 2016.
Meanwhile, mall operators here remain hopeful that the market will eventually recover.
“While the attraction of low air fares and favourable currencies from the region are hurdles those in the retail industry may need to overcome, we are confident that the retail sector will remain sustainable in the long run as long as we continue to deliver a social experience,” Lim said.
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