Rental gap narrowed to record low in 2011

Straits Times: Wed, Feb 22

THE rental gap between prime Orchard Road retail space and top suburban locations narrowed to its lowest level on record last year. The gap - it was just 97 cents per sq ft (psf) in the first quarter of last year - has tightened in recent years through a combination of rents rising in suburban areas and falling in Orchard Road. There has been something of a turnaround since then with the difference widening to $1.85 psf in the three months to Dec 31, according to property consultancy CBRE. The widest gap in the past few years was recorded in the fourth quarter of 2007 when prime Orchard Road space was going for $7.65 psf more than its suburban equivalent. The CBRE data showed that while prime suburban rents were at an all-time high of $29.75 psf in the fourth quarter of last year, prime Orchard Road rents have fallen considerably since their peak of $36.76 psf in the third quarter of 2008. By the fourth quarter last year, they were $31.60 psf. Prime rents refer to those levied on shops on levels with the heaviest human traffic. This could mean street-level units or basement shops that are on the same floor as an MRT exit. Experts say suburban rents fluctuate less as they cater to a catchment of shoppers and provide daily necessities unlike Orchard Road malls, which are more susceptible to changes in the economy and visitor arrivals. CBRE's director of retail services Letty Lee said the gap between Orchard and suburban rents started to widen again in the later part of last year, possibly due to an increase in suburban space, particularly the completion of nex mall in Serangoon. Supply in Orchard Road held steady last year, matched by healthy demand from rising tourist numbers. This led to the widening gap between Orchard and suburban rents, she added. But Ms Lee said that while it is tempting to compare the rental gap between Orchard Road and suburban malls, it is important to note that they are very distinct micro-markets. 'They each cater to different tenants and clientele, with very distinct tenant mix configurations and retail offerings,' she said. 'Suburban malls have a ready catchment of shoppers with a propensity to spend on daily necessities. Malls in Orchard Road cater to tourists and local residents who wish to shop for luxury goods.' CBRE estimates that 657,000 sq ft of retail space will be completed this year, most in the suburbs, while little new supply is coming up in Orchard Road. 'This may put some pressure on suburban malls but it is too simplistic to compare rents in Orchard Road with the suburbs,' Ms Lee noted. A fourth-quarter report by DTZ Research noted an uneven performance in shopping centres in the Orchard and Scotts roads retail belt. Shoppers seemed to have lost interest in older malls and were gravitating towards newer shopping centres with more varied retail concepts. Rents in the suburban areas also continued to stay flat due to the substantial supply of space in the pipeline, the report said. While some may fear an oversupply of shop space in coming years, Mr Alan Cheong, director of research and consultancy at Savills Singapore, said last month the firm has found that demand for retail space largely exceeds supply. 'With our population having increased significantly over the past 10 years, the retail space per capita has fallen from 8 sq ft to 7 sq ft,' he added. 'When it comes to the other sectors of the property market, there are many differing views. But retail is a sector that clearly has an uncluttered path ahead.' But there might still be some casualties this year as some players consolidate their operations, said Savills' senior director of retail and lifestyle Sulian Tan-Wijaya. However, with new international brands looking for prime space, retail rents are likely to stay healthy for now, she said. [e-mail] Gap in rents between prime Orchard Road retail space and top suburban locations Q4 2007: $7.65 psf Q1 2011: $0.97 psf Q4 2011: $1.85 psf APPLES AND ORANGES 'Suburban malls have a ready catchment of shoppers with a propensity to spend on daily necessities. Malls in Orchard Road cater to tourists and local residents who wish to shop for luxury goods.' Ms Letty Lee, CBRE's director of retail services, saying that Orchard Road and suburban malls are very distinct micro-markets Source: The Straits Times