Strata shop blues

By Michael Lim

/ The Edge Property |

December 1, 2015 9:45 AM SGT

On a Monday afternoon a fortnight ago, Janet Choey was found sitting in one of her hairstyling chairs, checking her hair and phone messages. There were no customers at the salon. “I expected it to be quiet, but not this quiet,” says the proprietor of Blossom Hair Salon.

Choey purchased the 161 sq ft shop unit on the first level of Viva Vista in a sub-sale for $550,000 ($3,406 psf) in 2013 and moved into the new premises six months ago. “This place is quieter than my old shop in Telok Blangah,” she says. Fortunately for Choey, she has regular customers and has also benefited from walkin customers, mainly expatriate tenants of the apartments on the upper floors of Viva Vista.

A five-storey mixed-use development along South Buona Vista Road, Viva Vista has 144 apartments on the second to fifth levels and 106 shops on the first and basement levels. The freehold project was developed by Oxley Holdings and obtained Temporary Occupation Permit (TOP) in September 2014.

Half a dozen of the 41 shops on the first level of Viva Vista were open for business that Monday afternoon. They included a drone store, a nail studio, a tailoring service, a pet spa and salon as well as Pet Lovers Centre.

Chan, the owner of a fresh produce wholesale distribution and trading company, says he moved into his 248 sq ft unit six months ago. He is operating his corner unit as an office, as Viva Vista is near his place of business, namely the Pasir Panjang Wholesale Centre. The rental rate he is paying is about $1,300 a month, which translates into $5.20 psf a month.

It is a far cry from the $8 to $14 psf monthly rate that most investors had hoped to get when they bought their units five years ago at the launch of the project, says Sam Tng, senior team director of property realtor LHG Properties. At $8 to $14 psf, they would have achieved gross rental yields of 3.5% to 6% per annum based on the purchase prices then. However, at $5.20 psf a month, the gross rental yield translates into just 2%, especially for those who purchased the units at higher prices in sub-sales in 2012 and 2013.

The vacant units on the basement level of Viva Vista

Struggling to find tenants Since the project’s completion a year ago, many of the strata shop owners who are investors are struggling to find tenants for their units. Shops that were taken up were closed on Mondays, with many operating only from Tuesday to Sunday. Many bore the “For Rent/For Sale” sign on their shopfronts. “Some landlords of the units on the basement level are prepared to reduce their asking rent to $1,000 a month, and still there are no takers,” says Tng.

Some of the shop owners were also aggrieved when they learnt that their units were zoned for retail use only. While takeaway of bakery and confectionery items, desserts and juice bars are allowed, URA only approves restaurants and cafés on a case-by-case basis. “I had a tenant who was keen to turn one of the units into an F&B outlet, but the application to URA was rejected,” recounts Tng. “Without F&B, the fear is that the mall will lack vibrancy.”

Given Viva Vista’s proximity to the National University of Singapore, Singapore Polytechnic, Singapore Science Park and one-north, an attempt was made to position Viva Vista as a “street-art-themed fashion mall” to appeal to a younger audience, says TJ Neo, senior marketing consultant at Huttons Asia. He and his colleagues are marketing several shop units at Viva Vista. They had even gone as far as engaging a graffiti artist to decorate the walls of some of the units. “The idea was met with lukewarm response,” he says.

Competition To make matters worse, the shop owners at Viva Vista now face competition from a newly completed project right next door. Called Icon @ Pasir Panjang, it has a double frontage along Pasir Panjang Road and South Buona Vista Road. The boutique freehold mixed-use development by Fragrance Group contains 31 strata shop units on the first two levels and 18 apartments on the upper three floors of the five-storey block. The project obtained TOP in September.

A 7-Eleven convenience store is expected to open soon at Icon @ Pasir Panjang. Many of the shops are still available for sale or rent, according to their signs. Some property agents reckon the shop units at Icon @ Pasir Panjang could fare better than those at Viva Vista given the more prominent street frontage, with a bus stop right in front of the shops and a public car park just across the road.

However, LHG’s Tng believes shop owners at Icon @ Pasir Panjang are equally anxious to find tenants. “I’ve received calls from investors of Icon @ Pasir Panjang asking if I could swing some tenants over to them,” he says.

Strata shop fever When Viva Vista was launched five years ago, things could not have been more different. The shop and apartment units were all sold in less than a month, with many being snapped up on the first day of sale via a balloting system. Shop units on the basement level were pre-sold at prices ranging from $2,001 to $3,200 psf. Units on the first level fetched $2,597 to $5,555 psf.

The most recent resale at Viva Vista was in July, according to a caveat lodged, and it was for a 161 sq ft shop unit on the first level that fetched $478,000 ($2,960 psf), which is slightly higher than the $466,900 ($2,892 psf) paid by the previous owner five years ago. “In the current market, some owners will be happy to offload their units if they receive offers of $2,900 psf,” says Tng.

Viva Vista was not the only mixed-use project that saw euphoric response when it was first launched. Others included Alexandra Central, East Village, KAP Residences and KAP Mall, as well as Pavilion Square at Geylang.

On Upper Changi Road is East Village by World Class Land, which was launched in March 2012 at an average price of $5,000 to $5,500 psf. Most of the freehold shops were snapped up within a few months.

At Alexandra Central by Chip Eng Seng Corp, 114 out of 116 strata shop units were snapped up on the first day of preview in January 2013. Units sold ranged from $2,777 psf to a high of $11,696 psf, according to caveats lodged. Meanwhile, Pavilion Square on Geylang Road saw all 93 retail shops taken up on a Saturday afternoon in March 2013. Units sold were priced at $2,000 to $10,879 psf.

View of the shops on the first level of Alexandra Central

“Back in 2010 to 1H2013, mixed-use developments with strata shops for sale were a craze,” recalls Mary Sai, executive director of investments and capital markets at Knight Frank Singapore. The eight successive rounds of property cooling measures from September 2009 to 2013 had also driven many investors to switch from the residential sector to the strata commercial sector, prior to the introduction of the total debt servicing ratio (TDSR) framework. Developers responded swiftly by launching mixed-use developments to cater for the increase in demand, she adds. “At the time, the best use for commercial space in mixed-use schemes was for retail and F&B.”

A new reality “The challenge now is that many of these projects are completing around the same time and therefore competing for the same tenants,” says Sai.

East Village, which contains 90 residential units and 108 shops, obtained TOP last year. The developer secured Cold Storage as an anchor tenant. And while it was able to attract F&B outlets and restaurants along the street front, the smaller retail shops within the complex took over a year to fill up.

The six-storey Alexandra Central obtained TOP in 4Q2014, but only opened for business about six months ago. The adjacent 442- room Park Hotel Alexandra, which is part of the mixed-use development, soft opened last month. Tenants there include Gain City, F&B outlets such as Alibabar, The Bake House by Carpenter & Cook and 328 Katong Laksa, as well as a beauty and hair salon, a nail spa and a mobile device accessories store. While many of the shops fronting the atrium have been taken up, those located along the secondary corridors are still vacant.

Besides competing with each other for tenants, these mixed-use developments have to compete for shoppers with full-fledged shopping malls as well. According to CBRE Research, a total of 470,000 sq ft retail space is scheduled for completion in 4Q2015. Another 1.84 million sq ft is projected to come on stream next year, with an additional one million sq ft in 2017.

Meanwhile, retailers remain cautious about expanding or entering the market as issues of manpower constraint, weaker retail sales and business costs continue to weigh on their decision- making, says Desmond Sim, head of CBRE Research for Singapore and Southeast Asia. This has led to an increase in vacancy rate since 2014.

“The retail landscape has also become tougher with e-commerce,” says Knight Frank’s Sai. “And with more people shopping online, some retailers are opting to shrink their shop space. So, the retail sector is facing challenges on many fronts simultaneously.”

Weakening rents, eroding rental yields Naturally, rents are affected. Average prime retail rents for first-storey shops had fallen 3.7% q-o-q to $30.90 psf in 3Q2015, says DTZ Research. They are also the lowest since 1Q2006, according to Lee Nai Jia, DTZ’s regional head of research.

While prime retail rents are now at $30.90 psf, landlords of units at Icon @ Pasir Panjang are asking for rental rates of $15 to $26 psf a month. The asking rent for a 75 sq ft corner shop unit at Icon @ Pasir Panjang was recently listed at $2,000 a month, while that of a 441 sq ft unit was $6,500 a month.

Falling rents will likewise have an impact on capital values. For example, Icon @ Pasir Panjang still has a number of strata shop units available for sale. When it was launched in March 2013, the freehold apartments were sold at prices ranging from $1,200 to $1,807 psf, based on caveats lodged. Meanwhile, the shop units were sold at $5,803 to $7,465 psf for the first level, and $2,406 to $4,650 psf for the second level, according to caveats lodged.

“The main challenge for investors these days is in finding tenants and achieving the promised rental returns,” says Vincent Lim, an associate group director at PropNex Realty.

More mixed-use developments completing A mixed-use development in the heart of a predominantly landed residential estate that is expected to be completed by the end of the year is Promenade @ Pelikat located off Hougang Avenue 1. The freehold project is developed by Oxley and fully sold. It contains 164 residential units and 270 strata shops. The main draw of the project was that there is no other retail offering of such a scale in the neighbourhood. Depending on the trade mix, the project could prove to be popular with residents, says Huttons’ Neo.

Another project that is also located in the heart of a predominantly residential estate is Space @ Kovan. The project by Roxy-Pacific Holdings contains 140 residential units and 56 strata shop units and is located along Yio Chu Kang Road, off Upper Serangoon Road. It was fully sold and completed last year. The challenge is that nex shopping mall, which is integrated with the bus interchange, Serangoon MRT station and public library, is located just two bus stops away from Space @ Kovan. “Most people prefer to head to nex to do all their shopping,” says a property agent who declined to be named.

Most of these mixed-use developments also lack a clear positioning, trade mix and marketing strategy, says Alice Tan, head of research at Knight Frank Singapore. Likewise, they lack a “robust advertising and promotion campaign”, which is critical in attracting patrons in the current market, she adds.

To draw retailers to Novena Regency, a new mixed-use development along Thomson Road, developer Fragrance Group has secured Market Place by Jasons as an anchor tenant. Since the project was completed in August, only a Thai restaurant, nail spa and maid agency have opened for business. While almost all the F&B units have been snapped up, there are still retail units available for sale at prices ranging from $8,333 to $8,577 psf, according to marketing agents.

Novena Regency is expected to benefit from the spillover crowd once the renovations at Novena Church across the road are completed next year. The freehold development has 55 apartments sitting on top of the retail complex with 31 retail shops and 14 F&B units.

To inject life into some of these projects, attempts had been made in the past to get the consensus of the strata unit owners to jointly appoint a professional property manager to handle the positioning, marketing and leasing of the units, says Knight Frank’s Sai. However, the challenge was in getting all the owners to agree. “Each owner has his or her own investment objective, and there are those who bought the units for their own use, so arriving at a solution is a very time-consuming process,” she adds. “Initially, vacancy will be relatively high as most of these projects will take one or two years after completion to fill up and stabilise.”

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This article appeared in the City & Country of Issue 702 (Nov 9, 2015) of The Edge Singapore.

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