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 since downgrading it from neutral in 1Q17 Retail market summary Key indicators (shop space) q-o-q change 1Q17 2Q17 Price index (4Q1998=100) -37% 1148 1105 Rental index (4Q1998=100) -12% 1013 1000 Potential supply (sqm GFA) 05% 442,000 444,000 Vacancy rate 01ppt 83% 84% Supply: Supply spikes in 2018 and 2019 will put further pressure on rental and occupancy In 2013 and 2014, Singapore saw its largest influx of retail space since 2006 and the market has yet to fully absorb the new supply (Chart 2), which resulted in a continuous decline in occupancy rate Recent and new supply were largely located outside the central region (Charts 5-7), proof that the government s push toward the live-work-play initiative in regional hubs is bearing fruit After three years of limited supply from 2015 to 2017 (Chart 2), 2018 and 2019 will see another spike of completions looming, stemming from three key projects: Changi Jewel, Paya Lebar Quarter, and Northpoint City (Table 1) The expectation of a laggard absorption rate will continue to put pressure on rental and occupancy Demand: Still weak, tempered by stagnant consumption growth Despite strong take-up rates in recently completed malls (eg Waterway Point opened with 95% occupancy 1 ), island-wide net absorption has been marginal since 2015 (Chart 2) and at the expense of rental (Charts 3-4) As of June 2017, shop occupancy rate across the country had fallen to 917%, from the high of 955% in 2013 Occupancy at Frasers Centrepoint Trust s malls continued to fall, down to 933% 2 from the average of 965% in 2015 Although occupancy for CapitaLand Mall Trust was more stable at around 985%, the portfolio has registered its first quarter of negative rental reversion in 1Q17 since the REIT s initial public offering, following the drop in average rental reversion rates to 10% during 2016, which was significantly below the average of around 6% over the past few years, and the lowest since 2009 Impact: Uneven, shoppers will favour comprehensiveness and diversity in offerings Retailers have been hit by several factors: (a) Declining sales efficiency (revenue per square foot) as a result of leakage from residents travelling abroad; (b) manpower shortage due to restrictions on foreign labour; (c) rising labour costs from minimum wage policies, and (d) stagnant consumption growth as confidence still needs to be built We believe the impact of retail headwinds will not be felt evenly across all malls In order to outperform, we think a mall needs to be well located, with comprehensive and diversified offerings 1 Based on recent media release in April 2016 2 Adjusted to exclude Northpoint which is currently undergoing major asset enhancement Page 1
Key Trends Cap rate compression Interestingly, despite the continuous decline in the retail price index not a representative figure per se due to the lack of benchmark transactions recently independent valuers tightened the cap rates used for their valuations this quarter For instance, the average cap rate for the properties from CapitaLand Mall Trust (Chart 1) saw an average cap rate compression of 45 basis points (bps), the largest decline in five years We believe this was mainly due to two reasons Firstly, the normalising of the market price The acquisition of Jurong Point, the largest suburban shopping mall in Singapore, by NTUC social enterprise Mercatus Co-operative in 2Q17 registered a net yield of 42% a record low for a mall of its size and considerably lower than the cap rates applied by valuers Secondly, uncertainties surrounding the retail outlook has eased Despite the surge in retail space supply in the next two years, the market is better at anticipating the consequence and adapting new strategies, with many retailers consolidating and rightsizing shops, and some mall operators rigorously re-planning their tenant mix Chart 1: Cap rate compression for properties in CapitaLand Mall Trust 1 Largest cap rate compression in the last five years 2 Valuers normalising their valuation to Jurong Point s record-breaking transaction at 42% net yield 3 Suggesting the uncertainties in the retail outlook has eased as retailers and mall operators are better able to anticipate the surge in supply with new strategies Source: CapitaLand Mall Trust, DBS Bank Chart 2: 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 since 2015 as landlords take longer to rent out the space in recently completed malls 2 We expect net absorption to continue to fall as retailers consolidate their operations and more supply come up in the next two years 3 Likewise, occupancy rates should continue to moderate to the low-90% level Source: Urban Redevelopment Authority, DBS Bank Page 2
Chart 3: Property rental index (shop) 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 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 Chart 4: Property median rental (shop) 1 In Orchard Road, median rental in nominal terms is at the 2007 level 2 In comparison, the rates of decline in City Fringe and Outside Central Region are lower 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 Northpoint City in Yishun and Changi Jewel, both slated to open in 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 to relieve 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 to directly cater to residents living in those areas Examples include Zara, Coach, Kate Spade, and Isetan Page 3
Chart 5: 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) 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 Chart 6: Upcoming retail developments by planning region (425,570 sqm of gross floor area) 1 New retail supply will be heavily skewed to the suburbs (OCR) 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) Chart 7: Upcoming retail space supply by expected year of completion and region 4 New supply of Downtown Core is concentrated in Funan Redevelopment (2019) and Marina One (2017) 1 Most of the pure-play retail supply had already entered the market in 2013 to 2015 Going forward, most of the supply will be part of mixeduse developments (ie including both office and retail, and possibly hotel component) 2 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 Page 4
Table 1: 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 DUO Tower/DUO Galleria/hotel development Cuscaden Road/Orchard Boulevard Fraser Street Granmil Holdings Pte Ltd Central 2,240 Ophir-Rochor Commercial Pte Ltd/Ophir-Rochor Hotel Pte Ltd/Ophir-Rochor Residential Pte Central 670 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 Marina One InterContinental & Robertson Quay Project (Hotel/retail Jalan Besar Marina Way/Straits View Prominent Site Pte Ltd/Prominent Plaza Investments Pte Ltd MS Commercial Pte Ltd/MS Residential 1 Pte Ltd/MS Residential 2 Pte Ltd Central 1,380 Central 18,000 Nanson Road RB Corp Pte Ltd Central 4,960 Oasis Terraces Punggol Drive Housing & Development Board North East 8,980 Eon Shenton Shenton Way 70 Shenton Pte Ltd Central 420 Tripleone Somerset (Additions/alterations to existing podium) Ibis/Novotel (Hotel/commercial/club Somerset Road Perennial (Somerset) Pte Ltd Central 11,340 Stevens Road Oxley Gem Pte Ltd Central 5,470 JTC Space @ Tuas Tuas Avenue 1 JTC Corporation West 4,970 Office/retail development Cleantech Loop JTC Corporation West 2,410 77,840 Source: Urban Redevelopment Authority, DBS Bank Page 5
Table 1: 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 90,630 City Gate Beach Road Bayfront Ventures Pte Ltd North 9,450 Bayview Hotel Singapore (Additions/alterations) Bencoolen Street Kah Motor Co Sdn Bhd Central 2,100 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 45,380 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 2019 and onwards Yishun Ring Road Northern Resi Pte Ltd/Northern Retail Pte Ltd North 7,740 210,160 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 5,060 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 Funan Redevelopment Meyappa Chettiar Road North Bridge Road MCC Land (Potong Pasir) Pte Ltd Central 5,000 HSBC Institutional Trust Services (S) Limited Central 46,550 Northshore Plaza I Northshore Drive Housing & Development Board North East 8,250 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) Office/retail development Beach Road/North Bridge Road Chulia Street/Church Street/Market Street Beach Road Hotel (1886) Ltd Central 29,020 HSBC Institutional Trust Services (Singapore) Limited Central 1,390 Maxwell Chambers Suites (Addition and alteration works) Maxwell Road Ministry of Law Central 380 Retail development Serangoon Road Corwin Holding Pte Ltd North East 10590 Office development Robinson Road Southernwood Property Pte Ltd Central 350 135,570 423,570 Source: Urban Redevelopment Authority, DBS Bank Page 6
Appendices Table 2: 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 2010 1160 1002 0% 0% 2Q 2010 1167 1007 1% 0% 3Q 2010 1176 1022 08% 15% 4Q 2010 1195 1041 16% 19% 1Q 2011 1200 1061 04% 19% 2Q 2011 1208 1076 07% 14% 3Q 2011 1219 1077 09% 01% 4Q 2011 1225 1086 05% 08% 1Q 2012 1223 1089-02% 03% 2Q 2012 1219 1095-03% 06% 3Q 2012 1210 1094-07% -01% 4Q 2012 1214 1096 03% 02% 1Q 2013 1207 1095-06% -01% 2Q 2013 1195 1089-10% -05% 3Q 2013 1204 1090 08% 01% 4Q 2013 1204 1106 00% 15% 1Q 2014 1200 1109-03% 03% 2Q 2014 1201 1119 01% 09% 3Q 2014 1207 1126 05% 06% 4Q 2014 1220 1126 11% 00% 1Q 2015 1211 1131-07% 04% 2Q 2015 1204 1127-06% -04% 3Q2015 1182 1103-18% -21% 4Q2015 1153 1095-25% -07% 1Q2016 1131 1077-19% -16% 2Q2016 1087 1047-39% -28% 3Q2016 1076 1043-10% -04% 4Q2016 1030 1012-43% -30% 1Q2017 1027 980-03% -31% 2Q2017 1014 965-12% -15% Source: Urban Redevelopment Authority, DBS Bank Page 7
Table 3: Shop median rental by region Median Shop Rental (S$ psf per month) Q-o-q Change Period Orchard OCR Fringe Orchard OCR Fringe 1Q 2010 101 54 65-02% 04% -03% 2Q 2010 102 54 65 08% 04% 01% 3Q 2010 102 55 65 05% 07% 08% 4Q 2010 104 56 66 17% 20% 15% 1Q 2011 105 57 66 06% 18% 03% 2Q 2011 107 58 67 19% 18% 06% 3Q 2011 107 58 67 04% 05% 09% 4Q 2011 107 59 68 02% 05% 06% 1Q 2012 107 59 68-02% 03% -02% 2Q 2012 107 59 67-01% 07% -06% 3Q 2012 107 59 67-01% -02% -09% 4Q 2012 107 59 67 01% 05% 03% 1Q 2013 107 59 66 00% 00% -06% 2Q 2013 107 60 66 00% 02% -02% 3Q 2013 108 60 67 09% 02% 08% 4Q 2013 108 60 67-01% 03% 03% 1Q 2014 109 60 67 07% 03% -05% 2Q 2014 109 61 67 02% 10% 02% 3Q 2014 110 61 67 05% 07% 04% 4Q 2014 110 61 68 06% 02% 12% 1Q 2015 109 61 68-08% 03% -07% 2Q 2015 109 61 67-03% -03% -07% 3Q2015 108 60 65-09% -20% -22% 4Q2015 106 60 64-20% -07% -26% 1Q2016 104 59 63-13% -15% -20% 2Q2016 101 57 60-33% -27% -40% 3Q2016 100 57 59-10% -03% -10% 4Q2016 99 55 57-05% -30% -49% 1Q2017 99 53 56-04% -33% -02% 2Q2017 98 52 56-13% -15% -14% Source: Urban Redevelopment Authority, DBS Bank Page 8
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