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Amid the continued impact of the total debt servicing ratio and the spectre of higher interest rates, coupled with the challenging economic backdrop, will the strata retail market be able to recover?
By Nikki De Guzman
Sentiment in the strata commercial property sales market are expected to remain tepid this year. Already, strata retail property transactions in the past two quarters have been subdued compared to those recorded last year.
Citing various existing challenges and headwinds, a further decline in transactions are expected for the rest of the year.
However, despite current market conditions, the strata retail scene still presents opportunities to buyers on the lookout, especially with a few strata retail units entering the market in the past six months.
In this issue, we look at the strata retail market and see what headwinds it currently faces, and what lies ahead in a seemingly pitfall-plagued market segment.
Muted demand
In the first six months of 2015, the strata retail market saw fewer caveats lodged compared to the previous half year.
In a Knight Frank report citing data from the Urban Redevelopment Authority’s (URA) Real Estate Information System (REALIS), the transaction volume of strata retail units stood at 121 caveats in the first half of last year, falling almost 52 percent from the 249 caveats lodged in H2 2014.
In addition to the enforcement of the Total Debt Servicing Ratio (TDSR), which, market experts said, effectively curbed investors’ ability to finance purchases, the softening of demand was the result of the cautionary approach prospective investors are taking. Newly completed strata retail projects also find difficulty attracting tenants.
According to the property consultancy, savvy buyers have become less interested in the overall commercial strata market, as they have become aware of the high vacancy rates in several recently completed commercial projects. The island-wide occupancy rate for strata retail market reached a new low of 92.8 percent in the second quarter of 2015.
Knight Frank noted that even well-managed retail malls are struggling with rising vacancy as a result of the tighter labour policies, threats from e-commerce and the slower global economy.
As demand for space moderates amid an uncertain economic outlook, Singapore’s strata retail market was expected to remain muted in the latter half of 2015.
Declines anew
The retail front of the commercial strata sector saw a 17.4 percent decline in the total number of caveats lodged on REALIS, from 121 in the first half down to just 100 in H2 2015. “As potential investors continue to be on the lookout for strata retail spaces, they are also observed to be mindful of the overall price quantum,” said Knight Frank.
In fact, the proportion of strata retail units transacted above the $1 million price tag shrunk to 66 percent in 2H 2015 from 71.1 percent in 1H 2015.
Given this, 2015 saw the strata retail segment fall to its lowest levels since the Global Financial Crisis, with strata retail transactions diving to a full year total of 221 deals worth S$393.7 million, down from 475 deals valued at S$918.6 million in 2014.
As high vacancies in several recently-completed strata commercial developments are keeping discerning buyers on the sidelines, the retail landscape was expected to face “one of its most challenging years in recent time” this year, as overall sale transaction volume are expected to remain tepid, according to Knight Frank.
A challenging year
With the slower economic outlook, demand for strata office and retail units was expected to slow further in H1 2016.
Against the challenging operating environment here, which added to the stress that retailers are already experiencing over proportionally higher operating costs, manpower constraints and stiff competition from e-commerce, Colliers International’s associate director for Research and Advisory, Doreen Goh said: “retailers remained cost-cautious”.
Despite this, strata retail transactions showed a slight improvement in the total caveats lodged in the first quarter of the year. From 41 caveats lodged in Q4 last year, the segment registered a 12 percent increase to reach 46 caveats lodged.
However, the improvement was immediately offset when the April to June period registered fewer caveats for strata retail units.
Q2 2016 saw strata retail transactions fall to just 39 caveats, a 15 percent decline from the previous quarter and a whopping 45 percent decline from the same period last year. In total, there were 85 strata retail caveats lodged for the first half of the year, falling 43 percent from the previous quarter and 47 percent from the same period last year.
“Generally, investors stayed cautious and held back on their purchases or investments in retail shops amid the challenging economic and retail operating environment,” Colliers said. This was in addition to the slowdown in leasing activity, the turbulent stock market, job insecurity and risk of further interest rate hikes, the property consultancy added.
Meanwhile, the median price trend for the strata retail segment saw a slightly upward movement at the end of the first six-month period after a continuous downward trend since the second half of 2015 as shown in Figure 2.
Despite this, the proportion of strata retail units transacted for over S$1 million still declined. The first half of 2016 only saw 59 units with a price tag of over S$1 million transacted, 25 percent lower than that recorded in the past six months, and 31 percent from the same previous last year.
Strata retail for sale
Amid the investors’ muted interest in strata commercial space, market experts believe that there are still owner-occupiers that may be looking out for value buys. An analyst CommercialGuru spoke to said the strata retail segment continue to offer opportunities to investors despite a generally slow property scene.
This proves to be true as some strata retail shops have entered the market in the past six months.
This includes the three-storey retail podium, Yishun 10 which was put up for sale by expression of interest earlier in May. The ground floor retail podium, which comprises a 10-hall cineplex on the upper floors, offers a total strata area of approximately 10,398 sq ft and comes with three levels of basement carpark.
According to DTZ’s Senior Director for Investment Advisory Services, Swee Shou Fern, given the rarity of the property, it is expected “to attract much interest from both investors and end-users due to its favourable location and vast catchment area, which naturally generate high levels of footfall.”
Meanwhile, a strata retail shopping centre was also recently put up for collective sale.
Katong Shopping Centre, which has an existing gross floor area of 280,203 sq ft, was put up for collective sale by tender earlier this June for a reserve price of S$630 million. This translates to a per sq ft per plot ratio price of S$2,248.
Cushman & Wakefield, the appointed marketing agency for the property said the asset may appeal to a developer keen on land-banking since the property “is not subject to Qualifying Certificate conditions as there is currently no residential component” in the development.
Outlook
As retailers in Singapore continue to suffer from weak consumer spending, high overheads from staffing and rental costs, as well as competition from the online space, the overall retail market here is expected to remain muted until the end of the year.
With the slower economic outlook deterring discerning buyers from entering the market, the projected demand for strata retail units could slow further in the second half of the year.
City Gate Shoppes
371 Beach Road
Type: Strata retail property
Developer: Bayfront Ventures (JV between World Class Land and Fragrance Group)
Tenure: 99-year leasehold
Nearby Amenities: Kampong Glam, Raffles Hospital
Nearest Transport: Nicoll Highway MRT, Bugis Interchange
Scheduled Completion: 2020
City Gate Shoppes contains 188 units of commercial space spread across a three-storey retail podium. Unit types include 157 shops ranging in size from 280 sq ft to 721 sq ft, 29 restaurants (452 to 1,044 sq ft), a food court (4,693 sq ft), and a supermarket (3,735 sq ft).
The supermarket anchor tenant will be located on the second floor, where a sheltered overhead walkway will link City Gate to the Nicoll Highway MRT station.
It offers 250m-wide frontage with high visibility, 3m high ceilings and a glass façade, which allows shop owners to showcase their products.
The shops will see high footfall from residents at City Gate, nearby office workers and students.
City Gate Shoppes forms part of the City Gate mixed-use development, which is developed by Bayfront Ventures, a joint venture between World Class Land and Fragrance Group.
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