New lease of life for malls?

The arrival of e-commerce giant Amazon in Singapore last week was one of the worst-kept secrets here.

For months, local customers had heard about the American online retailer's largest-ever warehouse - a 100,000 sq-ft facility at Mapletree Logistics Hub - as well as the promise of two-hour delivery service.

Traditional retailers, too, had been bracing themselves for this Amazonian challenge.

Investors in retail real estate investment trusts (Reits) should also take note, as analysts have identified e-commerce as a threat to retail rentals.

Retail Reits form the largest Reit sub-segment on the Singapore Exchange (SGX) and have long been known for their resilient yield and visible assets.

Shoppers would be familiar with many of these companies.

For instance, the largest retail Reit by market capitalisation is Capitaland Mall Trust, which owns 16 shopping centres, such as Raffles City, Tampines Mall and Westgate. It is also the largest shopping mall owner in Singapore, with 14 per cent of market share.

The local bourse lists 12 retail Reits and property trusts, which have retail properties within their asset portfolios, with a combined market cap of $30.9 billion.

These trusts have generated a market cap weighted average total return of 16.2 per cent in the year-to-date, noted a SGX report last week.

But the challenging landscape has probably taken a toll on some of these landlords.

The 6.1 per cent average dividend yield of retail Reits is slightly lower than the 6.4 per cent average achieved by Singapore Reits.

Nonetheless, some retail Reits have performed exceptionally.

The five best performers in the year-to-date are Croesus Retail Trust (48.6 per cent), Lippo Malls Indonesia Retail Trust (31.2 per cent), CapitaLand Retail China Trust (21.5 per cent), Suntec REIT (19.7 per cent) and Mapletree Commercial Trust (19.6 per cent).

SGX's report last week highlighted the structural issues in the local retail sector.

Latest data from the Urban Redevelopment Authority (URA) showed that vacancy rates for retail space continued to rise to 8.1 per cent in the second quarter of this year, up from 7.7 per cent in the previous quarter.

The looming vacancies have been occuring against the backdrop of softening rents and prices over the past year.

With online retailers finding complementarity in having an offline presence, the prospect for retail space demand has improved and rents with it.
Mr Alan Cheong of Savills research on threat of e-commerce to mall owners

But there is a sliver lining as the pace of decline is slowing.

Latest URA data show that prices of retail space decreased by 3.2 per cent in the second quarter of this year, compared with the decrease of 4 per cent in the previous quarter.

Rentals of retail space decreased by 1.2 per cent in the second quarter of this year, compared with the decrease of 2.9 per cent in the previous quarter.

At the same time, online shopping volume is expected to increase this year.

Last year, a research report by online payment system PayPal showed that more than a third of Singaporeans (38 per cent) think they will be spending more online this year.

Mobile commerce will be the largest contributor to e-commerce's growth in Singapore, and mobile shopping spending here is expected to increase by 42 per cent this year, amounting to more than $1.2 billion.

But e-commerce does not necessarily spell gloom for mall owners, noted property analysts.

Several e-retailers have established a physical presence in Orchard Road over the past year.

In January, online furniture retailer HipVan set up a permanent flagship store, taking up 11,000 sq ft at The Cathay in Dhoby Ghaut.

SHORT-TERM LEASES

Some other fashion e-retailers such as Reebonz, Love Bonito and Ohvola took up shorter-term leases, opening stores in Suntec City Mall and Orchard Gateway, enabling shoppers to see, feel and try out products, noted Savills Research.

"With online retailers finding complementarity in having an offline presence, the prospect for retail space demand has improved and rents with it," said Mr Alan Cheong of Savills Research.

A more traditional challenge - oversupply- also poses risks to rental and occupancy.

A Colliers International report on Monday noted that there were a total of 2,898 leasing deals in the second quarter of this year, up 51 per cent quarter-on-quarter, but vacancies still increased because of the new supply.

SGX's report noted that new retail space supply is expected to peak next year, adding almost 2,700,000 sq ft.

But it could also present new opportunities as most of the upcoming retail spaces are located in the heartlands.

"...New supply has largely been located from outside central regions (examples include the completed Punggol Waterway Point, Changi Jewel and Paya Lebar Quarter), reflecting the Government's push towards a live, work and play concept in regional centres and decentralised business districts.

"In addition, many retailers previously located only in the Orchard area are moving into suburban malls to cater to residents in those areas," noted SGX.