Industry Outlook Retail Real Estate (Singapore)

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Bonnie Bishop
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Refer to important disclaimers at the end of this report DBS Group Research Asian Insights Office 16 May 2017 Overall Outlook Supply: We have kept a negative overall outlook for Singapore s retail

1 Refer to important disclaimers at the end of this report DBS Group Research Asian Insights Office 16 May 2017 Overall Outlook Supply: We have kept a negative overall outlook for Singapore s retail real estate sector since downgrading from neutral last quarter A supply spike in 2018 will put further pressure on rental and occupancy In 2013 and 2014, Singapore saw its largest influx of retail space since 2006 Recent supply has been largely located outside the central region (Chart 1), reflecting that the government s push toward a live, work and play concept in regional hubs is bearing fruit The recently completed Waterway Point (95% tenanted 1 ) continues to see good demand, an indication that retailers remain keen to tap into suburban demand for goods and services After three years of limited supply from 2015 to 2017, 2018 will see another spike of completions looming, stemming from three key projects: Changi Jewel, Paya Lebar Quarter and Northpoint City (Charts 2-4) Retail market summary Key indicators (shop space) On-quarter change 2016 fourth quarter 2017 first quarter Price index (4Q1998=100) -53% Rental index (4Q1998=100) -12% Potential supply (GFA) 38% 426,000 sqm 442,000 sqm Vacancy rate 07ppt 76% 83% Source: Urban Redevelopment Authority Demand: Tempered by retail headwinds Despite strong take-up rates in recently completed malls, net absorption has been marginal to negative since 2015 (Chart 5) Existing malls have, in general, been under occupancy and rental pressure As of March 2017, shop occupancy rates across the country had fallen to 917%, from the high of 955% in 2013 Occupancy for Frasers Centrepoint Trust fell by 16 percentage points to 949% (adjusted to exclude Northpoint which is undergoing an asset enhancement initiative) from the average of 965% in 2015 Although occupancy for CapitaLand Mall Trust was more stable at around 980%, it has registered its first quarter of negative rental reversion at the portfolio level in 1Q17 since the REIT s IPO, after the average rental reversions dropped to 10% during 2016 The reversion numbers were significantly below the average of around 6% over the past few years, and the lowest since 2009 Retailers have been hit by several factors: (a) declining sales efficiency (revenue per square foot), as a result of e- commerce and leakage from residents travelling abroad; (b) a manpower shortage due to government restrictions on foreign labour; and (c) rising labour costs from minimum wage policies Faced with declining revenues and rising costs, retailers have, since 2014, begun to consolidate their operations, cutting down on the number of stores they operate while maintaining a presence only in better-performing malls The impact of retail headwinds will not be felt evenly across all malls, in our view We believe that in order for a mall to outperform, it needs to be well located with a strong track record of recurring footfall and tenant sales, and have active asset management and advertising and promotion efforts 1 Based on recent media release in April 2016 Page 1

Key Trend Moving to the outskirts The retail experience for locals will be an increasingly suburban affair The majority of shopping mall completions in the past year have been located in the suburbs:

Waterway Point in Punggol opened in January 2016, and Northpoint City in Yishun (2018) and Changi Jewel (2018) are among the largest suburban developments in the pipeline Just as we have seen in

congestion in the central business district and Orchard Road As a result, we have seen many retailers that were previously only in the Orchard Road area moving into suburban shopping malls in order

2 Key Trend Moving to the outskirts The retail experience for locals will be an increasingly suburban affair The majority of shopping mall completions in the past year have been located in the suburbs: One KM in Tanjong Katong, Big Box in Jurong East, Paya Lebar Square in Paya Lebar and Seletar Mall in Seletar, for example Looking ahead, new retail space will still be largely focused in the suburbs Waterway Point in Punggol opened in January 2016, and Northpoint City in Yishun (2018) and Changi Jewel (2018) are among the largest suburban developments in the pipeline Just as we have seen in Jurong East, the government has been actively encouraging the continued development of regional centres in decentralised areas as key working and leisure destinations, as a means of relieving the congestion in the central business district and Orchard Road As a result, we have seen many retailers that were previously only in the Orchard Road area moving into suburban shopping malls in order to directly cater to residents living in those areas Examples include Zara, Coach, Kate Spade and Isetan Chart 1: Historical net additions to shop space - Suburban retail stock (Outside Central) has been growing at a faster pace 1 Retail shop supply additions in recent years have been mainly in the Outside Central Region ( ; OCR, dark grey columns) 2 In the OCR, major completions since 2013 include Westgate, JEM, Sports Hub, One KM, Seletar Mall, Paya Lebar Square, Big Box and Waterway Point 3 Waterway Point, the latest mall to have obtained its temporary occupation permit in the 2015 fourth quarter, added around another 30,000 square metres (sqm) of space to the retail sector Source: Urban Redevelopment Authority, CEIC, DBS Bank Chart 2: Upcoming retail developments by planning region (443,700 sqm of gross floor area) 1 New retail supply will be heavily skewed to the suburbs (OCR) with around 46% of total gross floor area (GFA) 2 This is in line with the government s strategy of decentralising and creating regional work, live, play hubs 3 A large proportion of OCR retail supply will be in the East Region (ie Changi Jewel) 4 New supply of Downtown Core is concentrated in Funan Redevelopment (2019) and Marina One (2017) Source: Urban Redevelopment Authority, CEIC, DBS Bank Page 2

3 Chart 3: Upcoming retail space supply by expected year of completion and region 1 Most of the pure-play retail supply had already entered the market in 2013 to 2015 (Chart 1) 2 Going forward, most of the supply will be part of mixed-use developments (ie including both office and retail components) 3 Key supply will come from Northpoint City in Yishun (North, OCR), Paya Lebar Quarter (Fringe, Central) and Changi Jewel in Changi (East, OCR), all slated for completion in 2018 Source: Urban Redevelopment Authority, CEIC, DBS Bank Page 3

4 Chart 4: Upcoming retail developments by expected year of completion and size of retail space Project Name Street Name Developer Region Retail Space Sub-total 2017 (sqm) Hotel development Hill Street Singapore Telecommunications Limited Central 190 HD 139 (Additions/alterations) Cecil Street Ececil Pte Ltd Central 430 The Biltmore Singapore Post Centre (Additions/alterations and extension) Farrer Square Cuscaden Road/Orchard Boulevard Granmil Holdings Pte Ltd Central 2,240 Eunos Road 8 Singapore Post Limited Central 25,000 Farrer Park Station Road RB Capital Farrer Hotel Pte Ltd/RB Capital Farrer Commercial Pte Ltd Central 610 DUO Tower/DUO Galleria/hotel development Fraser Street Ophir-Rochor Commercial Pte Ltd/Ophir-Rochor Hotel Pte Ltd/Ophir-Rochor Residential Pte Ltd Central 3,700 Office/retail development Hoe Chiang Road Fragrance Grandeur Pte Ltd Central 11,170 Royal Square At Novena Irrawaddy Road Hoi Hup Sunway Novena Pte Ltd Central 5,210 ARC 380 Jalan Besar Prominent Site Pte Ltd/Prominent Plaza Investments Pte Ltd Central 1,380 Marina One Marina Way/Straits View MS Commercial Pte Ltd/MS Residential 1 Pte Ltd/MS Residential 2 Pte Ltd Central 18,380 InterContinental & Robertson Quay Project (Hotel/retail Nanson Road RB Corp Pte Ltd Central 4,970 Oasis Terraces Punggol Drive Housing & Development Board North East 8,980 Eon Shenton Shenton Way 70 Shenton Pte Ltd Central 480 V On Shenton Shenton Way UIC Investments (Properties) Pte Ltd Central 830 Tripleone Somerset (Additions/alterations to existing podium) Ibis/Novotel (Hotel/commercial/club Somerset Road Perennial (Somerset) Pte Ltd Central 11,370 Stevens Road Oxley Gem Pte Ltd Central 5,460 JTC Tuas Tuas Avenue 1 JTC Corporation West 4,970 Wallich Residence at Tanjong Pagar Centre/Sofitel Singapore City Centre/Guoco Tower/Tanjong Pagar Centre Wallich Street TPC Commercial Pte Ltd/TPC Hotel Pte Ltd/Wallich Residence Pte Ltd Central 4, ,340 Source: Urban Redevelopment Authority, DBS Bank Page 4

5 Chart 4: Upcoming retail developments by expected year of completion and size of retail space (continued) Project Name Street Name Developer Region Retail Space Sub-total 2018 Changi Jewel (Hotel/retail Airport Boulevard Changi Airport Group (S) Pte Ltd East 90,000 City Gate Beach Road Bayfront Ventures Pte Ltd North 9,450 Bayview Hotel Singapore (Additions/alterations) Bencoolen Street Kah Motor Co Sdn Bhd Central 2,020 Frasers Tower Cecil Street FC Commercial Trustee Pte Ltd Central 2,800 Paya Lebar Quarter Paya Lebar Road/Sims Avenue Roma Central Pte Ltd/Milano Central Pte Ltd/Verona Central Pte Ltd Central 43,980 Superluck Project (Office/retail Robinson Road Superluck Properties Pte Ltd Central 7,410 Woods Square Woodlands Square Woodlands Square Pte Ltd North 5,550 Northpoint City Yishun Central 1 North Gem Development Pte Ltd/FC North Gem Trustee Pte Ltd North 39,100 Wisteria Mall Yishun Ring Road Northern Resi Pte Ltd/Northern Retail Pte Ltd North 7, , and onwards Anson Project (Office Anson Road Hub Synergy (S) Pte Ltd Central 160 Sentosa Project (Hotel/retail Artillery Avenue/Beach View Fontaine Investment Pte Ltd Central 5,030 Qingjian Project (Residential apartments/retail Bukit Batok West Avenue 6 Qingjian Realty (BBR) Pte Ltd/Qingjian Realty (BBC) Pte Ltd West 5,090 Claymore Project (Hotel Claymore Road UOL Claymore Investment Pte Ltd Central 1,920 Keppel Projector (Office/retail Hoe Chiang Road Mansfield Developments Pte Ltd (subsidiary of Keppel Land Ltd) Central 9,310 IMall Marine Parade Central Marine Parade Central Pte Ltd Central 6,920 The Poiz Residences/The Poiz Centre Meyappa Chettiar Road MCC Land (Potong Pasir) Pte Ltd Central 5,000 Funan Redevelopment North Bridge Road HSBC Institutional Trust Services (S) Limited Central 46,160 Northshore Plaza I Northshore Drive Housing & Development Board North East 8,250 Yotel (Hotel Orchard Road Yat Yuen Hong Co Ltd (a unit of Hong Fok Corp) Central 1,070 9 Penang Road Project (Office AFRO Asia Building (Office Penang Road Park Mall Pte Ltd Central 1,500 Robinson Road Afro-Asia Shipping Co (Pte) Ltd Central 130 Centrium Square Serangoon Road Feature Development Pte Ltd Central 4,010 Raffles Hotel and shopping arcade (Additions/alterations) Beach Road/North Bridge Road Beach Road Hotel (1886) Ltd Central 29,020 Office/retail development Chulia Street/Church Street/Market Street HSBC Institutional Trust Services (Singapore) Limited Central 1,390 Office development Robinson Road Southernwood Property Pte Ltd Central ,310 Source: Urban Redevelopment Authority, DBS Bank 443,700 Page 5

Chart 5: Net absorption of retail supply and occupancy rate 1 Following spikes in net additions of shop space over 2013 to 2014, net absorption has been marginal to negative since 2015 as landlords

6 Chart 5: Net absorption of retail supply and occupancy rate 1 Following spikes in net additions of shop space over 2013 to 2014, net absorption has been marginal to negative since 2015 as landlords take more time to fill up the space in recently completed malls 2 We expect net absorption to continue to fall going forward, as retailers consolidate their operations amid headwinds and more supply coming up in the next couple of years Source: Urban Redevelopment Authority, DBS Bank Chart 6: Property rental index (shop) 3 Likewise, occupancy rates should continue to moderate in the next one to two years to the low-90% level 1 Rents in the Central Area have been weakening at a faster pace than rents in the fringe area in the last two years 2 Rental index in the Central Area has fallen around 20% from the peak in June 2008 and around 16% from December 2014, as retailers consolidation efforts accelerate on the back of space oversupply 3 Rental indices have fallen to the level last seen in 2010; we do not expect recovery to be imminent as supply crept up after 2010 while occupancy remained on the downtrend Source: Urban Redevelopment Authority, CEIC, DBS Bank Chart 7: Property median rental (shop) 1 In Orchard, median rental in nominal terms is at the 2007 level 2 In comparison, the rates of decline in City Fringe and OCR are lower Source: Urban Redevelopment Authority, CEIC, DBS Bank Page 6

7 Appendices Table 1: Shop rental indices by region (index 1998 fourth quarter = 100) Shop Rental Index Q-o-q Change Period Central Area Fringe Area Central Area Fringe Area 1Q % 0% 2Q % 0% 3Q % 15% 4Q % 19% 1Q % 19% 2Q % 14% 3Q % 01% 4Q % 08% 1Q % 03% 2Q % 06% 3Q % -01% 4Q % 02% 1Q % -01% 2Q % -05% 3Q % 01% 4Q % 15% 1Q % 03% 2Q % 09% 3Q % 06% 4Q % 00% 1Q % 04% 2Q % -04% 3Q % -21% 4Q % -07% 1Q % -16% 2Q % -28% 3Q % -04% 4Q % -30% 1Q % -03% Source: Urban Redevelopment Authority, DBS Bank Page 7

8 Table 2: Shop median rental by region Median Shop Rental (S$ psf per month) Q-o-q Change Period Orchard OCR Fringe Orchard OCR Fringe 1Q % 04% -03% 2Q % 04% 01% 3Q % 07% 08% 4Q % 20% 15% 1Q % 18% 03% 2Q % 18% 06% 3Q % 05% 09% 4Q % 05% 06% 1Q % 03% -02% 2Q % 07% -06% 3Q % -02% -09% 4Q % 05% 03% 1Q % 00% -06% 2Q % 02% -02% 3Q % 02% 08% 4Q % 03% 03% 1Q % 03% -05% 2Q % 10% 02% 3Q % 07% 04% 4Q % 02% 12% 1Q % 03% -07% 2Q % -03% -07% 3Q % -20% -22% 4Q % -07% -26% 1Q % -15% -20% 2Q % -27% -40% 3Q % -03% -10% 4Q % -30% -49% 1Q % -33% -02% Source: Urban Redevelopment Authority, DBS Bank Page 8

9 We Cover CapitaLand Mall Trust Frasers Centrepoint Trust Mapletree Commercial Trust SPH Real Estate Investment Trust YTL Starhill Global Real Estate Investment Trust Our In-House Expert Derek Tan CA Please note that DBS Bank Ltd may have research coverage in the companies mentioned in this industry report, that have been produced prior to or subsequent to its publication Please refer to the links below for the latest specific equity research reports published on below-mentioned companies and the accompanying disclaimer/disclosure of DBS interest in the companies mentioned in the respective reports Page 9

10 GENERAL DISCLOSURE/DISCLAIMER The information herein is published by DBS Bank Ltd (the Company ) It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose Opinions expressed are subject to change without notice Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind 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Industry Outlook Retail Real Estate (Singapore)

Industry Outlook Retail Real Estate (Singapore) Refer to important disclaimers at the end of this report DBS Group Research Asian Insights Office 22 August 2017 Overall Outlook Maintain a cautious overall outlook for Singapore s retail real estate sector