Asian Retail Rents Plateau as Global Slowdown Bites
When a landlord in Singapore was negotiating the lease of his two-storey shop-house in the historic district of Bugis earlier this year, he was happy that he could get “decent rates”.
“The tenant drove a pretty hard bargain, so it was pretty much the same as a few years ago. But I know that rents in the area should be a lot higher,” the Singapore permanent resident said, referring to the shop’s location near the central area of the city. He declined to reveal the exact rent he got, but said it’s between S$6,000 ($4,815) and S$8,000 a month for the 1,500 square-feet space.
He is one of the shop-owners in Singapore who managed to keep rents flat at best this year as the global economy continues to deteriorate and drag on Asia’s retail rents, which had until now been resilient. According to CBRE, a property research firm, landlords of shops in malls and High Street across the region were generally unable to get higher rents in the second quarter compared to a year before. Analysts also tell CNBC that there may be room for rents to fall in the second half of the year as retail sales soften in key markets as such Singapore and Hong Kong.
“Retailers displayed greater resistance to the high rents demanded by some landlords whilst some newer projects offered rental discounts,” CBRE said in its latest report on the retail sector. “(Quarter-on-quarter) rental growth has slipped below 1 percent for the past three quarters as retailers turn cautious amid the weakening global economic environment.”
As a result, rents in prime shopping centers in Singapore were flat in the second quarter from the first quarter at $468 per square foot per year, according to data from CBRE. Rents in Shanghai also were steady at $480 per square foot per year and Hong Kong’s at US$3,867.
Rents Hit by Sluggish Spending; Second Half Will Be Tougher
Worsening consumer sentiment in Hong Kong, which boasts the highest rents in Asia, means retailers that are renewing their leases in the second half of the year will be more reluctant to cough out higher rents.
Retail sales in the territory have moderated since the beginning of 2012 with real growth falling to 9.1 percent year-on-year in the year to July 31, from the 18.5 percent in 2011, according to official figures.
Retailers blame a slowdown in the number of Chinese tourists in the second quarter. Even as growth in tourist arrivals grew 13 percent in May from a year earlier, it’s the slowest pace since February 2011.
“Half of our sales over the past 24 months are from Chinese customers,” said a salesperson at an outlet of an Italian luxury retailer at Hong Kong’s shopping district of Causeway Bay, who declined to be named. “There is no question that this year is a lot slower than last year, so that affects us.”
It’s a similar story in Singapore, where retail sales declined between 4.8 percent and 6.5 percent in May from the previous month, and across all sectors from watches and jeweler, apparel and footwear, to telecommunications equipment and computers. It crept up in June, but was still down 0.9 per cent from a year earlier.
The tougher climate means retailers are willing to forgo prime locations for cheaper venues to save on rent.
“One or two years ago, people were willing to pay 30-40 percent more than the previous tenant to get prime space,” said Joe Lin, Senior Director of Retail Services with CBRE in Hong Kong. “Now, retailers are more selective. Those that don’t need prime space facing the main roads are already giving up their space because they are seeing sales decline.”
Competition for Best Places
Nonetheless, the best spaces in the top retail markets will still command top rents because of the limited supply, consultants say. Spanish label Zara, for example, agreed to pay $1.4 million each month starting next year for a shop facing Queen’s Road, Central in Hong Kong, twice that paid by current tenant H&M.
At the same time, new brands are entering Asia for the first time and existing labels that are doing well want to expand. A retailer in Singapore, who declined to be named because of a confidentiality agreement, said it agreed to pay more than $700 per square foot per year for a shop facing Orchard Road in a new building, more than 50 percent the average rent on the street.
“Competition for good space is stiff,” the retailer said. “And we are pretty sure that sales growth here will be much better than what we are seeing in the U.S. so we’re looking at the longer-term prospects, which should still be solid.”
Sebastian Skiff, Executive Director of CBRE Retail in Asia said he expects rents to consolidate at the current levels in the second half of the year but that “core locations in core markets in core cities will face constant pressure”.
“Not only do we have the existing retailers in the space, you have new players in town that need to establish themselves in the best locations,” Skiff said.
This will lend support to prices in some districts, especially in Hong Kong and and Beijing.
- By CNBC's Jean Chua.