Retailers Hit by Soaring Rentals

FF Fashion

The Straits Times
Aug 23, 2008

Retailers hit by soaring rentals
Many are struggling to maintain bottom line, but no relief in sight yet

By Michelle Tay


FOR a retailer, it is a nightmare scenario - getting stuck in a shop with expensive rent that attracts no shoppers. Yet retail rental levels, especially in prime areas, are still skyrocketing despite the slower economy.

That has left industry players wondering if retailers who committed to lease shop spaces at very pricey levels have over-extended themselves.

'The top retail rents of about $80 per sq ft (psf), which were announced recently by Ion Orchard, are a cause for concern,' said Mr Colin Tan, head of research and consultancy at Chesterton International. 'How do you ensure a reasonable profit?'

Said Mr Nash Benjamin, chief executive of fashion retailer FJ Benjamin: 'Very, very few people can pay that rate. It's a top-end rate which everyone's making big noise about, but it's neither a realistic nor sustainable rate.'

'A lot of retailers are struggling,' noted Ms Lau Chuen Wei, executive director of the Singapore Retailers' Association.

She said: '(It's getting) more difficult for retailers to maintain top line sales. And what's hitting them quite hard is sustaining the bottom line.'

According to Jones Lang Lasalle, average retail rents are about 27 per cent higher than they were 10 years ago.

They stood at an average of $41.25 psf a month in the first quarter of this year, compared to about $32.50 psf a month in the first quarter of 1998.

They have risen about 57 per cent since the rock-bottom days of the Asian financial crisis, when they hit $26.25 psf in the first quarter of 1999.

CB Richard Ellis said 'super-prime space along Orchard Road saw the highest quarterly increase of 5.3 per cent, hitting an average of $54.40 psf a month'.

'If the shop size is very small and the shop is situated in a very busy place, the rentals can be as high as $60 psf or more. (But) the majority will be between $10 and $50 psf,' said Mr Nicholas Mak, Knight Frank's director of research and consultancy.

Retailers interviewed by The Straits Times all sigh with despair at the rising rentals, which property consultants say show no sign of abating yet.

'Quite a good number of retailers are getting worried about whether they can sustain present sales volumes in the current economic slowdown,' said Mr Danny Yeo, Knight Frank's director of retail.

'But have they been complaining that sales have dropped by a very substantial amount? I don't think so.'

Other industry experts agree, saying that demand for prime retail spaces remains high.

Rising demand is reflected in the rising occupancy rate, said Mr Mak, who added that the average occupancy rate for retail space in Orchard Road rose from 95.4 per cent in the middle of last year to 96.7 per cent in the middle of this year.

Knight Frank said in a recent research brief that the projected supply of five million sq ft of retail space expected to be completed next year will 'serve to relieve the supply crunch seen over the past couple of years'.

It added that 'retailers can look forward to higher retail sales psf' as the nominal retail sales figure is expected to rise from $650.60 psf last year to almost $700 psf in 2010.

And it seems the so-called retail hot spots have remained roughly the same through the years.

Property consultants are unanimous that Orchard Road remains Singapore's primary and premier shopping belt, mainly because of its central location and the large density of malls on the strip.

Said Chesterton's Mr Tan: 'Orchard Road has been Singapore's only major shopping belt. Other shopping areas just cannot match up to Orchard Road in terms of size, quality and variety.'

'If we classify retail hot spots according to the level of shopper traffic, the malls nearer to Orchard MRT Station would still be considered the hottest,' said Ms Daisy Loo, head of leasing and consulting at Sandalwood Retail.

By these experts' definition, malls such as the upcoming Ion Orchard and Orchard Central would certainly make it to the 'Singapore's hottest retail spaces' list and continue commanding premium rental rates from retailers.

So would the Orchard Road-facing double-storey stores in existing malls Ngee Ann City, Wisma Atria, Paragon and Mandarin Gallery.

'At the end of the day, it's who wants who more,' said Ms Lau.

'We've heard of times when the mall can bend backwards to accommodate what the tenant wants.'

Said Mr Yeo: 'I think, going forward, retailers contracting for renewal will just be more careful about committing to a $60 or $80 psf kind of rent.'

Mr Benjamin said: 'I always tell our landlords to please remember one thing - You own the property but we are your customers. If we can't afford to rent your premises, you have a problem. So be nice to your customers.'