Ah, to be a suburban mall owner

 

Wednesday, Mar 26, 2014

Cai Haoxiang

The Business Times

Someone told me once he wanted to come back in his next life as either an insurance company boss or a suburban mall owner. I'm not sure what kind of karma he would have to accumulate in his current life to be bestowed with that good fortune in the next, but it certainly sounds like an agreeable proposition.

Why not? Certain suburban malls, for example, seem to enjoy a durable competitive advantage - the kind that makes value investors drool over their Porter five forces analyses and discounted cash flow calculations.

A comparison of the profitability of Singapore malls shows that the most profitable tend to be located in suburban centres like Tampines, Bishan and Yishun - suburban in Singapore being defined as a location not within the Central Business District.

A prime example would be Bishan's Junction 8. Around a one-kilometre radius are HDB flats, landed property, condos, industrial buildings, well-known schools like Raffles Institution, Catholic High, St Joseph's Institution, a mosque, a church, a stadium and swimming pool, and a library. There are some eateries and shops by the HDB blocks around it, but the mall has otherwise no competition in sight - the nearest malls are probably AMK Hub and the Toa Payoh Central area. Those two places, arguably, pale in comparison.

Land around Bishan is mostly built up. No alternative malls should be springing up anytime soon. Junction 8 thus has a captive audience of the estimated 65,000 HDB dwellers living nearby and perhaps some of the 109,000 people living in Toa Payoh flats and another 150,000 living in Ang Mo Kio flats as well, not including those living in private property and the students, workers and other people using the various amenities nearby. Bishan is also accessible.

Bishan MRT station beside Junction 8 is an interchange for the North-South and Circle lines. Bishan is also a 10-minute train ride away from Orchard, and has a bus interchange too.

Shopper traffic in 2012, by the way, was 29.2 million - the third highest among CapitaMall Trust malls after Bugis Junction and Raffles City. This translates to roughly 80,000 people a day.

A tenant that leaves is easily replaced, looking at Junction 8's occupancy history. It was fully occupied for eight of 10 years from 2003 to 2012, through Sars and the global financial crisis, with the only exceptions being 2004 (99.8 per cent occupancy) and 2012 (99.6 per cent). This slipped to 99.4 per cent last year, perhaps reflecting a tougher retail environment as costs rise.

However, shopping malls which cater to people's basic needs will have a sustainable advantage, especially in Singapore. People here like to eat out, for instance. The Singaporean weather is hot, humid, and rainy. Shopping malls offer plenty of good food across all price ranges in comfortable settings.

Mall tenants cater to a spectrum of needs. By having a tenant mix squarely in the mass market segment, suburban malls ensure a constant stream of visitors. The tenant mix in a place like Junction 8 will give a rough idea of the magic formula required. It has bakeries BreadTalk and Four Leaves, mass market fashion chains Cotton On, G2000 and Giordano, Chinese food like Din Tai Fung and Crystal Jade, DBS Bank, a Food Junction food court, a Golden Village cinema, fast food chains McDonald's, KFC, MOS Burger, Subway, telco shops SingTel, StarHub and M1, a Coffee Bean & Tea Leaf, a Swensen's ice cream restaurant, Best Denki and Challenger for electronics, Japanese food chains like Sakae Sushi, shops selling crocs, flip flops, a Cristofori Music School and an NTUC supermarket in the basement.

Suburban malls do not need unique, quirky boutiques and fine dining restaurants to be profitable. By being the only mall around and catering to basic needs of people living nearby, they will do just fine - especially when located in a densely populated, middle to upper-middle class area like Bishan.

It is thus no surprise that the mall is doing just fine, with one of the highest net property income (NPI) per square foot of net lettable area (NLA) among malls in Singapore's listed Reits. Based on latest figures, the mall generated net property income of $157 per square foot in 2013.

This is akin to renting out a 1,000 sq ft condominium and enjoying $157,000 in profit a year after the deduction of maintenance expenses and property management fees, before mortgage payments and other costs.

This works out to takings of roughly $13,000 a month. Do you get $13,000 a month from renting out your condo?

No? Start working on that karma.