Retailers hit by soaring rentals

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.'

** Singapore's hottest retail spots

* 1: Ion Orchard

Location: Being built at the corner of Orchard Road and Orchard Turn

Top rental range: $60 to $80 per sq foot (psf) per month

Star tenants: Six double-storey stores totalling 50,000 sq ft,
including luxury fashion brands Prada, Louis Vuitton and Cartier

* 2: Wisma Atria

Location: On Orchard Road between Ion and Ngee Ann City

Top rental range: $55 to $70 psf

Star tenants: Double-storey Nike concept store, totalling 8,000 sq
ft, which has taken over the former Topshop space.

* 3: Mandarin Gallery

Location: At the corner of Orchard and Bideford Roads

Top rental range: $50 to $60 psf

Star tenants: Double-storey stores, ranging from 2,700 sq ft to 6,800
sq ft, for Emporio Armani, Marc by Marc Jacobs and D&G.

* 4: Ngee Ann City

Location: At the corner of Orchard and Bideford Roads

Top rental range: $40 to $60 psf

Star tenants: Luxury giants Chanel and Louis Vuitton on the first
floor. They are due to expand into double-storey spaces, or duplexes,
over the next two years - Chanel into a 7,000 sq ft store and Louis
Vuitton into a 10,500 sq ft one.

* 5: Paragon

Location: At the corner of Orchard and Bideford Roads

Top rental range: $40 to $60 psf

Star tenants: Four duplexes facing Orchard Road, ranging in size from
3,600 sq ft to more than 10,000 sq ft, to be occupied by luxe labels
Gucci, Salvatore Ferragamo, Prada and Tod's.

Note: Rental figures provided by Mr Danny Yeo, director of retail at
Knight Frank