The retail market in Singapore has had a “slow start to the year”, with occupancy across the island declining 1.4 percentage points (ppt) q-o-q to 91.2%, say DBS Group Research analysts, but a stronger recovery in prime central regions of downtown core and orchard in the coming quarters is anticipated.
In their May 19 report, analysts Derek Tan, Dale Lai, Rachel Tan and Geraldine Wong say that while most regions across Singapore registered a q-o-q decline in tenant occupancy, Orchard saw the largest decline, retreating 6.0 ppt q-o-q, while suburban occupancy continues to stand at the highest at 96.4%.
“Occupancy for both Downtown Core and Orchard are at 0.6ppt and 8.1ppt, respectively, below the average occupancy in 2019,” say the analysts. “Before the onset of the pandemic, the prime-suburban occupancy gap generally hovered below 2% across 2019, while the disparity in occupancy continued to be high at an average of 5.2% in 2022.”
However, the analysts say that retail rents saw smaller declines for the quarter while the Urban Redevelopment Authority (URA) Retail Rental Index continued into its eight consecutive quarter of decline.
“The Central region, Central Fringe, and Fringe region rental indices declined 0.3%, 0.1%, and 0.6% q-o-q, respectively,” they say.
Meanwhile, the average monthly retail sales declined 7% q-o-q from a monthly average of $4.24 billion in 4Q2022 to $3.95 billion in 1Q2023.
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Physical retail sales (excluding motor) hovered around 95% this quarter, while the online portion of retail sales (excluding motor) was range bound, hovering in the range of 12.5% to 15.2%.
The food & alcohol segment, wearing apparel and footwear segment, and department store segment registered higher y-o-y growth in March, at 55%, 27% and 17% respectively.
The analysts say that demand for this first quarter has tapered off from the festive peak in 4Q2022, at around 20% above normalised levels.
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“Orchard malls tapered down to [about] 100% to 120% of pre-Covid levels this quarter, from [about] 140% to 150% in 4Q2022. Suburban tenant sales continued to be range bound, with a marginal decline q-o-q,” say the analysts, while noting that Frasers Centrepoint Trust reported tenant sales in the range of [about] 109% to 115% of normalised levels for the quarter.
With tourism arrivals in Singapore surpassing the 1 million mark for a second straight month, the analysts are upbeat on a robust recovery momentum for the retail REITs. Tourism spending is expected to be supported by fast-returning Chinese tourists, and eventually benefitting Orchard Road proxies, such as Lendlease REIT and Paragon REIT.
Notably, this quarter saw stronger retail reversions and occupancy across most retail S-REITs.
The analysts also note that occupancy cost has compressed to levels on par with pre-Covid-19 levels, which implies that recovery in underlying tenant sales has outpaced the recovery in passing rents, which are about 15% below the pre-Covid-19 level.
“With the expected improvement in retail spending over the rest of the year, we should see bargaining power slowly shifting back to the landlords.” they say.
Full-year occupancy ended the year at 92.6%, in line with the analysts forecast of 92.5% while they aim for a higher estimate of 93% in 2023 led by recovery in occupancies in Central and Orchard.
On the other hand, rising construction costs and prolonged delays have the analysts expecting retail projects in the pipeline to face a delay of at least two quarters, while recent redevelopment project completions face low risk of competition within the listed landlord space.
The analysts note that there are bigger projects in the pipeline which are generally concentrated in the fringe areas including mixed-use development at Punggol Way and The Woodleigh Mall. Other projects that will be completed beyond 2024 include Changi Airport Terminal 5 and a mixed development in Pasir Ris.
