The retail sector is one of the hardest hit by the ongoing Covid-19 outbreak. According to the latest URA figures, rents of retail space in the central region declined by 2.3% q-o-q in 1Q2020, after two consecutive quarters of growth. Prices of retail space also fell by 3.1% q-o-q in 1Q2020.
Stringent safe distancing and other “circuit breaker” measures have made it worse for the sector from mid-February with vacancy rates moving up to 8.0% in 1Q2020 from 7.5% in 4Q2019. CBRE’s head of research Desmond Sim says higher degrees of stress were registered in the fringe areas with the rental decline the highest among all regions. The decline of 5.1% y-o-y was also the highest since 1Q2017, when rentals last fell by 3.7%.
Consultants believe that retail malls will be the most negatively impacted due to sharp declines in footfall (Photo: Albert Chua/The Edge Singapore)
The amount of occupied retail space decreased by 463,000 sq ft, compared to the increase of 280,000 sq ft the previous quarter. Christine Li, Cushman & Wakefield’s head of research, says that while both islandwide demand and supply fell, the fall in net demand (463,000 sq ft) outweighed net supply (-161,000 sq ft). It is the largest fall in net demand in six years since 1Q2014, which shows that more retail spaces are being vacated than occupied.
With the circuit breaker measures extended to June 1, non-essential retailers will continue to suspend operations. As a result, retail occupancy is expected to decline further in 2Q2020 with retail malls being the most negatively impacted. Experts believe that the true impact of Covid-19 will be only seen then.
CBRE’s Sim says: “Rental decline is expected to accelerate next quarter, as most existing tenancies were still locked in during 1Q2020 when the Covid-19 pandemic was still in its infancy. The downward pressure on rents was mitigated by reliefs from landlords, such as offering marketing assistance, allowing tenants to use security deposits to offset rental payments, and offering rental rebates passed down from government property tax rebates.”
“Moving forward, landlords will face increasing pressure to strike a balance between vacancy and rents; they might have to lower rents in a bid to maintain healthy occupancy rates,” he adds.
Cushman & Wakefield’s Li also believes that 1Q2020 URA figures on the retail sector may not be fully reflective of ground conditions, as a significant portion of these transactions could have been done pre-Covid-19. She notes that 78% of caveats lodged in 1Q2020 were submitted in the first two months of this year.
Meanwhile, Colliers International’s head of research Tricia Song says that retail sales — excluding that of motor vehicles — declined 10.2% y-o-y in February. The sharp declines in footfall have also led to severe cash flow constraints.
Comparing the impact of the outbreak to that of SARS, Song says: “During SARS, retail rents fell 2.6% in 1H2003 and 3.4% for the full year in 2003. We believe the impact of Covid-19 could be more detrimental and forecast a 5% decline in average retail rents in 2020.”
Tay Huey Ying, head of research and consultancy of JLL Singapore, notes that retailers are cautious and have held back expansion plans and lease negotiations due at the later part of the year. Some lease renewals were committed at shorter lease terms and at lower rents. She adds that during this challenging time, retailers with deep balance sheets and online capabilities will more likely survive.
Colliers’ Song says one positive factor is that the new supply of retail space will stay tight in 2020, taking up 0.3% of total stock which is far less than the 10-year historical average of 1.4%. The tight supply will remain until 2024. Furthermore, the new supply is concentrated in suburban and fringe areas, where “there is a well-defined population catchment”.
Read also: