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7th July 2014

Singapore Real Estate

Retail rents to hold up despite supply

Healthy demand and the fact that rents tend to be 'sticky' cited

Source: Business Times / Top Stories

[SINGAPORE] Retail rents may either hold or inch up over the next few years despite new supply coming onstream. This is supported by a healthy demand for retail space and the fact that rents tend to be "sticky" in nature, property analysts say.

This projection provides cold comfort to retailers looking for a breather from rising business costs. It also goes against the government's hopes of easing rents with its estimated 600,000 gross square metres of retail space supply from 2014 to 2016.

JLL head of research for Singapore and South-east Asia Chua Yang Liang believes that retail rents will remain stable in the next three years, supported by healthy pre-commitment levels in recently completed malls and for the uncompleted pipeline.

For instance, Orchard Gateway recently opened with nearly full occupancy while the soon-to-be completed refurbishment of Shaw Centre has secured 90 per cent commitment.

"Vacated spaces have been quickly taken up as evidenced by Metro's takeover of Robinson's former 130,000 sq ft premises at Centrepoint, which is poised to be completed by the fourth quarter," Dr Chua said.

In the suburban areas, retail rents are also expected to hold up, even though a good 65 per cent of the estimated 4.1 million sq ft of new net lettable retail area to be rolled out by 2016 will be located in these regions, while only 7 per cent of the supply will be in the Orchard/Scotts area, said DTZ's regional head (SEA) of research, Lee Lay Keng.

"Upcoming malls such as The Seletar Mall and One KM have reported healthy pre-commitments while there are still retailers looking at expanding in the suburban malls to tap the population living in nearby housing estates," she said.

Analysts expect prime retail rents in the Orchard/ Scotts Road area to rise in the next three years given limited new supply there. Maybank analyst Ong Kian Lin estimates that Orchard Road prime retail rents will grow 2.5 per cent from 2014 to 2017 on a compound annual growth rate basis.

Suburban malls enjoy higher footfall than some prime luxury malls on Orchard Road, possibly because residents frequent the former more for necessity shopping, he observed. But the conversion rate of footfall to sales is higher at Orchard Road malls, which are more patronised by tourists.

The gap between Orchard Road and suburban mall rents has also narrowed over the years, said Savills Singapore research head Alan Cheong. Monthly rents (without the percentage gross turnover portion) for prime retail space in Orchard Road and suburban malls averaged $34.60 and $31.10 psf respectively in the first quarter.

Mr Cheong noted that grouses by retailers over high rents stem from a disconnect between declining sales and a stubbornly high rental base. Retail rents here typically consist of a base rent and a percentage of gross turnover, so a decline in sales of a tenant should translate to lower rent paid to the landlord. Yet, rents have not budged for some retailers.

Douglas Benjamin, chief operating officer of FJ Benjamin Holdings, an international luxury and lifestyle brand retailer, said: "It's fair if you are in a mall where business is good and the landlord wants to increase your rent. But if your sales have fallen, maybe because another mall has opened next door, it doesn't make sense for your landlord to want to raise rents."

But a study by the Ministry of Trade and Industry (MTI) showed that for most of the renewals in 2012 and 2013, the effective increase in rent per annum was in line with inflation over the period of their lease. Growth in retail rents in the core downtown and city fringe areas was also flat in Q1 compared to a year ago, according to the URA rental index.

But rentals for prime spaces islandwide tracked by Knight Frank, which looked at more comparable units of 350-1,500 sq ft with the best frontage, connectivity, footfall and accessibility, 

were relatively resilient. Rents for such spaces rose 1.9 per cent in the first quarter from a year ago, driven by higher rents for such spaces in Marina, City Hall and Bugis.

Apart from rents, retail businesses are contending with higher labour costs, tighter foreign workerpolicies and a strong Singapore dollar. The growth of e-commerce is also eating into the sales pie of brick-and- mortar retailers, consultants say.

"We believe that over time, online shopping will be a game changer and unless one is talking about the very high-end products or those where personal service is still deemed irreplaceable, the rest of the retail industry will undergo major structural changes," Mr Cheong said.

"Only food and beverage may for now survive but there is a limit to how much space a landlord can convert to F&B use," he added. "Therefore, we believe that it could be online shopping, working through the demand side, rather than increased supply that will ultimately bring down rents."

Ms Lee of DTZ, however, downplayed the impact from e-commerce. "There will still be consumers who seek the wholesome retail experience of seeing, touching and trying on their goods before they buy," she said. More online retailers such as blog shops are also setting up physical shops, she added.

-By Lynette Khoo & Lee Meixian

Why retail rents are still a sticking point

Declining sales not factored into rents, complain retailers

Source: Business Times / Top Stories

[SINGAPORE] Rents have been a sticky issue for retailers, even though consecutive data released lately shows that retail rents have eased and will be capped by the upcoming supply in retail space.

Retailers decry that rents have not factored in their declining sales. This runs contrary to the fact that most lease agreements have a variable rent component based on gross turnover (GTO).

Most landlords here, except for strata-titled owners, charge their tenants a base rent and a percentage of GTO. The rent structures vary across tenants and locations. Some tenants pay both a base rent and a turnover rent of 0.5-2 per cent; others pay by either that formula or purely turnover rent of 10-20 per cent - whichever is higher. There are other permutations in the rent calculations.

Whatever the case, having a turnover rent as part of the total rent computation should have made overall rents more susceptible to the revenues of retailers.

-By Lynette Khoo

Retailers free to choose non-Reit landlords

But industry watchers say retailers' options may soon narrow

Source: Business Times / Top Stories

[SINGAPORE] Retailers do have the freedom of contract to choose which type of landlord to lease space from, be it shopping malls owned by real estate investment trusts (Reits), developers, property funds, or small-time owners of strata unit stores, industry watchers say.

This freedom weakens the validity of their grouses that Reit-owned malls are imposing too-steep rental increments and injecting too many unfair terms into lease agreements. They have the option of renting from another mall owner with less onerous terms.

That said, their options may soon narrow in future, as other categories of landlords begin to adopt the business practices used by Reits and some property funds. At the same time, the choice of available landlords is also shrinking as more malls previously in the hands of other landlords now come under the control of Reits.

One main gripe retailers have is the harsh terms and conditions included in lease agreements, such as having to pay a significant chunk of their turnover (25 per cent, for instance, is deemed insurvivable for business) together with the base rent.

Other such terms include possible eviction if a minimum sales target is not met, short notice needed to be given for tenants to vacate a space, as well as the landlord not having to compensate the tenant if he decides to redevelop the building and relocate the latter.

"Every lease agreement has some of these things," noted Douglas Benjamin, chief operating officer of FJ Benjamin Holdings, an international luxury and lifestyle brand retailer.

But while these sorts of contractual terms are deemed unfair to retailers, they are not regarded as anti-competitive, according to Burton Ong at the National University of Singapore law school. "They don't harm competition, they just make life very difficult for the tenants," he said.

There is not much relief for retailers looking to get out of these "harsh and one-sided" contracts, partially due to their insufficient bargaining power and simply put, because "they entered into these agreements eyes open", he added.

It is also unlikely that any legal avenue for smaller retailers seeking relief from onerous contracts will be set up any time soon, because it will appear inconsistent with the pro-business environment the Singapore government is trying to maintain, he said.

Associate Professor Ong thinks that the troubles plaguing retailers are an inevitable part of operating a business in a capitalistic market-based economy.

"Parties are expected to look after their own interests, even when up against another party with much stronger bargaining power. Freedom of contract means the tenant is free to choose if he wants to accept these terms or look elsewhere."

Retailers couldn't hide their turnover even if they wanted to. Some malls, especially those owned by major retail Reits, harness a point-of-sale system, where each time the cash register is rung up, sales data is captured and fed to the landlord's computer system.

Mr Benjamin concedes that Reits are just doing their job: "There's no need to vilify the Reits particularly, they're doing what they're mandated to do, which is to get the best returns for their shareholders, and every business has to do that."

To be sure, Reits are also finding it increasingly difficult to compete, said DTZ's SE Asia chief operating officer Ong Choon Fah.

They may enjoy a great headstart over developer-owned malls (the recent trade ministry study showed that rents grew 20 per cent at Reit malls between 2009 and 2013, compared to 9.2 per cent for single-owner malls on a compounded annual growth rate basis), but they are their own greatest enemy.

"In a way, Reits are a victim of their own success, because they always have to compete against themselves, to how well they did last quarter," said Ms Ong.

Part of the reason for Reits' active management of their malls is that they have to account for what they have done, to investors every quarter. Also, because every square foot is a revenue generator, Reits tend to squeeze returns - both rental and advertising - from their space.

The difficult part, says Chew Tuan Chiong, CEO of the manager of Frasers Centrepoint Trust, is finding that equilibrium - how much you can increase the leasable floor area by without resulting in clutter or deteriorating the shopping experience; how much rent to charge tenants so that they will stay and the Reit can still distribute a decent return to unitholders.

"It's actually the equilibrium that we are striving at. It makes no sense for us to charge too high a rent and change tenants too frequently because there is downtime every time there is a tenant change. Our objective is to help tenants succeed because if they don't do well, it affects us too. The relationship between landlord and tenant is quite symbiotic."

Yet, it has come to this: that retailers' rental and manpower woes have turned them cautious about expansion. FJ Benjamin is relooking which stores to keep and which to give up for profitability or strategic reasons, while restaurant chain The Rotisserie said it will relook its outlets when it is time to renew their leases.

But are there really as good non-Reit alternatives out there, and can they be effective substitutes?

DTZ's Ms Ong believes that some developer- owned malls can be as well managed as Reit malls, with less traffic but higher conversions to sales. She cites the example of Allgreen Properties' Great World City, favoured by shoppers for its good tenant mix, expanse of space and slower pace.

As for strata-titled malls, they can sometimes work for certain target groups, as in the cases of Lucky Plaza and Queensway Shopping Centre. "Sometimes people also want to go somewhere a bit disorganised, so there's an element of surprise," Ms Ong said.

At least 600 "more promising lots" of new strata shops in mixed development projects are scheduled for completion in the next couple of years, which may reverse the image of strata malls as small-sized, drab malls lacking in diverse retail offerings, said R'ST Research director Ong Kah Seng.

-By Lee Meixian

Real Estate Companies' Brief

Prudence the key to FCT's stability

Its suburban malls strategy and low gearing cited for Reit's resilience

Source: Business Times / Top Stories

[SINGAPORE] When speaking to the CEO of Frasers Centrepoint Trust's (FCT) manager Chew Tuan Chiong, one senses the caution and prudence with which he runs the suburban retail real estate investment trust (Reit).

Not surprisingly then, he is incredibly proud of the stability of his Reit, which has delivered higher gross revenue, net property income and distribution per unit every year since its listing in 2006 - a momentum unbroken even during the 2007-2008 global financial crisis.

Dr Chew attributed the Reit's resilience partly to its portfolio of wholly suburban malls.

"These malls cater mostly to residents in surrounding areas and their non-discretionary spending. They sell necessities - products like groceries, services like haircuts - things you need whether there's an economic boom or bust," he said.

-By Lee Meixian

Views, Reviews & Forum

Keeping cool over property measures

Source: Straits Times

It should have come as no surprise that on the first anniversary of the most significant measures aimed at underpinning principles of prudent borrowing and lending, a fresh call should come from the property industry for a review of measures that have left the market here listless and lacklustre.

More complaints lodged against renovation contractors each year

Industry observers link the trend to poorly-qualified interior designers and contractors who rush work.

Source: Channel News Asia / Singapore

SINGAPORE: Gripes about errant renovation contractors have risen in recent years, despite efforts to boost professionalism in the trade.

The number of complaints against home renovation contractors climbed to 1,779 last year, figures from the Consumers Association of Singapore (CASE) showed, a 16 per cent increase from 1,532 the year before and a 35.5 per cent jump from 1,313 in 2010.

Industry observers TODAY spoke to linked the rising trend to poorly-qualified interior designers and contractors who rush work, leading to subpar quality. They noted that there are few barriers of entry for interior designers and sub-contractors to enter the industry.

Mr Dominic Ong, the co-owner of a design and renovation firm, said he has encountered many inexperienced interior designers. “They call themselves designers, but are in fact salespeople. They don’t have good knowledge and their main objective is to close deals,” he said.

An owner of a design firm who declined to be named agreed. “Any Tom, Dick and Harry can join to be a designer. They will go through a crash course and then go ahead and meet clients,” he said. Problems arise when they do not know how to implement what they have drawn.

Another issue, he said, are the limitations faced by sub-contractors. Labour shortages have made it hard for them to hire skilled workers, so many contractors just “grab” whoever they can get, even if they are substandard, he added.

CASE executive director Seah Seng Choon said strong demand for services may also lead some to cut corners by speeding up work. Others may also have trouble meeting completion dates.

Mr Shawn Ng, project director of interior design firm Visual Dreams, noted that most sub-contractors are Malaysian. “With the foreign worker levy being so high, they are facing problems coming in and many have gone back to Malaysia to run their businesses,” he said.


Industry players say there is no official licensing requirement for home renovation contractors or sub-contractors. The Building and Construction Authority licenses builders and regulates building work to ensure the safety of buildings, but not renovation contractors, as their work does not impact building safety.

The Housing and Development Board has a list of registered renovation contractors that home owners must engage to renovate their flats. It also has two-day training courses for registered renovation contractors, said its spokesman.

Members of the Singapore Renovation Contractors and Material Suppliers Association (RCMA) have to abide by the Singapore Renovation and Decoration Code of Practice. CASE also has 21 renovation contractors accredited under its CaseTrust scheme.

Mr James Ho, 43, an electrician, said whether one lands a good sub-contractor depends on luck as there are many who are not experienced enough.

But Mr Tan Chim Hoon, chairman of the RCMA, begged to differ. Estimating that only 20 per cent of the complaints are legitimate, he said customers these days often demand more than what was initially agreed upon.

“And when it cannot be done, they don’t want to pay you and they complain,” he said.

Mr Paul Soh, who installs air-conditioning, agreed. “Customers will ask a lot of questions and insist on changing what was agreed. Or they want to bargain (on) the price again,” he said.


Mr Seah said home owners should ensure their contracts with contractors have all the necessary details before work commences and they should get regular updates on progress.

Contractors should also ensure that all requests are put in writing so there is no misunderstanding.

“Consumers are advised to obtain different quotations before committing to a service package so they will be less vulnerable to misrepresentation, overcharging and pressure sales tactics,” he said.

“The contract agreement should also reflect clear itemised billing and listing of products and services. Payment for services should be rendered progressively and not paid in full up front.”

To curb unreasonable requests from customers, Mr Tan said he is in discussions with CASE to work out an arrangement such that when a complaint is received, the RCMA, together with the contractor and the client, will visit the home to assess who is at fault and make recommendations. He hopes to implement it by this year.

There are a few black sheep in the industry, he said, so consumers have to do their research before signing on the dotted line.

“Some are lazy and don’t check, so they let some errant contractors take advantage of that. In the end, it gives the rest of us who do good work a bad name,” he added.


Global Economy & Global Real Estate

Johor to charge fee for each sq ft of Iskandar land reclaimed

Source: Straits Times

Property developers involved in land reclamation activities in the Iskandar Malaysia development zone are being slapped with charges for land they reclaimed - a move the government says will help fishermen whose livelihood is affected.

Johor To Tax Developers For Sea Reclamination

Source: Today Online / World

KUALA LUMPUR — Developers involved in sea reclamation work in the Malaysian state of Johor will have to pay a RM0.30 (S$0.12) tax for every square foot as part of a special aid programme for fishermen whose livelihoods are affected by the work, the state’s Chief Minister Mohamed Khaled Nordin said yesterday.

Mr Mohamed Khaled said the state expected to collect RM104 million from a total acreage of 3,237.48ha of reclamation activities in and around the Iskandar special economic region that would come under the payment scheme, The Star reported.

Developers would be receiving letters informing them of the move, which takes effect immediately, he said.

Noting that the state government was serious about the issue of fishermen affected by the sea reclamation work, he said the amount of aid to be disbursed to the fishermen would be decided and announced at a budget meeting in November.

Mr Mohamed Khaled also said Johor would set up an international zone designated for foreigners interested in residing in the state.

The zone would allow the state government to limit property purchases by foreigners and the special taxes collected in the zone would be allocated towards the development of other areas outside the Johor Baru district, he added.

A massive reclamation project in Johor recently came under scrutiny both within the state and in neighbouring Singapore after the Republic and non-governmental organisations raised concerns over the environmental impact of the project.

The Forest City project, a housing development in the Straits of Johor near Singapore’s Second Link, involves creating a 1,817ha island almost three times the size of Ang Mo Kio and includes a 49ha tourist hub as well as luxury homes.

Singapore had earlier expressed concerns about the possible transboundary impact of the reclamation work in the Strait and requested more information from Malaysia so that it would be able to undertake a study on the impact of the reclamation work.

Malaysian media reports later said several amendments were expected to be made to the project to minimise the environmental impact. AGENCIES

Institutional investors push up home prices

PE firms, hedge funds and pension systems buying US homes to rent out

Source: Business Times / World

[NEW YORK] Wall Street is driving up home prices again, but this time it is not by granting mortgages to customers who cannot afford houses. Instead, institutional investors have been buying up relatively inexpensive homes, particularly in areas hard hit by foreclosures during and after the Great Recession.

In the Atlanta area, prices of the least expensive homes have more than doubled since March 2012, when home prices nationwide hit bottom, according to the Standard & Poor's/ Case-Shiller indexes of home prices.

That is by far the best performance by relatively inexpensive homes in any of the 16 markets for which the S&P/Case-Shiller indexes break out performance by thirds of the market.

Atlanta is also the market in which institutional investors have been most active, accounting for 14 per cent of the homes bought during the most recent eight quarters, according to figures compiled by Realty- Trac. Those investors - mostly private equity (PE) firms, hedge funds and pension systems - buy the homes to rent out.

-From New York, US

Dubai to build world’s biggest shopping centre

Mall of the World project will also include climate-controlled street network and theme park

Source: Today Online / Business

DUBAI — The shopping-loving city that is home to one of the world’s largest malls wants to build one even bigger.

Dubai ruler Sheik Mohammed Rashid Al Maktoum has laid out plans for a sprawling real-estate project known as Mall of the World that will include the eight million sqf mall, a climate-controlled street network, a theme park covered during the scorching summer months as well as 100 hotels and serviced apartments.

Other attractions planned for the site include a cultural and theatre district drawing inspiration from New York’s Broadway, shopping thoroughfares based on London’s Oxford Street and a “wellness district” meant to attract medical tourists.

“The growth in family and retail tourism underpins the need to enhance Dubai’s tourism infrastructure as soon as possible,” Sheik Mohammed said in a statement announcing the project on Saturday.

“This project complements our plans to transform Dubai into a cultural, tourist and economic hub for the two billion people living in the region around us — and we are determined to achieve our vision.”

Dubai Holding, a conglomerate controlled by the emirate’s ruler, is developing the complex. It provided no details about the cost or completion date.

The complex will be built near the Mall of the Emirates, which boasts an indoor ski slope, and will be a short drive from the Burj Khalifa — the world’s tallest tower — and the adjacent Dubai Mall.

That shopping centre is currently the emirate’s largest and has attractions including a dinosaur skeleton, an indoor ice-skating rink and a multi-storey aquarium.

Dubai has long used high-profile, big-ticket real-estate projects to drive economic growth and establish itself as an international tourist destination. Its ambitions were slowed significantly by a crippling financial crisis that came to a head in 2009, forcing the delay or cancellation of some of the most outlandish projects.

Dubai Holding was not spared the financial turmoil and some of its divisions sought new repayment terms from lenders on a debt pile that reached billions of dollars.

The emirate’s economy has rebounded strongly in the years since the crisis, driven by its trade-, transportation and tourism-dependent economy.

Dubai is racing to develop additional infrastructure needed to accommodate a surge in visitors expected when it becomes the first Middle Eastern city to host the World Expo in 2020.

The authorities expect the expo to generate US$23 billion (S$28.6 billion) between next year and 2021, and estimate that it will cost US$8.4 billion to organise.

The new mall project alone is expected to create an additional 20,000 hotel rooms. AP