Retail space rental and capital values remained depressed

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1 Research & Forecast Report Singapore Retail Retail spending fell short on dwindling visitor arrivals According to the statistics available from the Department of Statistics, the retail sales index (excluding motor vehicles) recorded a negative year-on-year (YoY) growth of 7.9% in January 2015, after contracting by 0.3% YoY. The retail sales slowdown in January 2015 was on the back of shrinking sales for the discretionary consumer categories of recreational goods, which shrank by 14.5%. Spending on food and beverage (F&B), as well as on wearing apparel and footwear, also contracted by 43.5% and 12.5%, respectively, compared to the same period a year ago. 25% % 75 10% 5% 50 0% 25 YoY % Change 20% 100-5% 0 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Singapore s retail property market started the year 2015 on a soft note as the challenging retail landscape arising from the double whammy of tight labour market and declining retail sales kept rents and capital values depressed. Retail Sales Performance (Excluding Motor Vehicles) Retail Sales Index (2014=100, at Constant Prices) Retail space rental and capital values remained depressed Accelerating success. Index -10% YoY Change Source: Singapore Department of Statistics/Colliers International Research The lacklustre retail sales performance was in part contributed by the weaker-than-expected tourism industry. Visitor arrivals to Singapore in 2014 registered a first decline since 2009 and missed the annual target of 16.3 million to 16.8 million visitors set by the Singapore Tourism Board (STB). According to the latest statistics from the STB, total visitor arrivals to Singapore for the whole of 2014 moderated by 3.1% year-on-year (YoY) to about 15.1 million. Tourism receipts also fell below the target of between $23.8 billion and $24.6 billion, standing at $23.5 billion in 2014, unchanged from The decline in visitor arrivals in 2014 was mainly due to the arrival of fewer Chinese tourists, which plunged by a significant 24.2% YoY, as a confluence of factors including the MH370 disappearance incident and political unrest in Thailand have led to Chinese tourists avoiding Southeast Asia altogether, including Singapore. Excluding the Chinese visitors, Singapore s total visitor arrivals in 2014 would have increased by 5.1% YoY.

2 Number of Visitors Performance of Tourism Industry 1,600,000 1,400,000 1,200,000 1,000, , , , ,000 0 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 50% 40% 30% 20% 10% 0% -10% -20% YoY % Change the average monthly gross rents for prime ground floor retail space at Orchard Road corrected further by 0.9% on a quarter-on-quarter (QoQ) basis to $35.83 per sq ft (those of) the Regional Centres managed to continue to nudge up slightly by 0.3% QoQ to $33.94 per sq ft in. With rents in Orchard Road and the Regional Centres continuing to move in the opposite direction in the first three months of 2015, the rental premium that prime retail space in Orchard Road commands over similar space in the Regional Centres narrowed further from 6.9% as of December 2014 to 5.6% as of March Source: Singapore Tourism Board/Colliers International Research Performance of prime retail space rents divided Disappointing visitor arrivals and weak retail sales continued to put retailers on guard, resulting in their unrelenting resistance towards rental increases. This, coupled with most fashion retailers and F&B operators on Orchard Road becoming increasingly cautious towards expansion due to rising operating costs, had put a drag on retail rents. Consequently, in the quarter ending March 2015, the average monthly gross rents for prime ground floor retail space at the premier shopping belt of Orchard Road corrected further by 0.9% on a quarter-on-quarter (QoQ) basis to $35.83 per sq ft, after slipping by a marginal 0.2% QoQ in the preceding quarter. In contrast, supported by a ready pool of population catchment in the suburban locations, the average monthly gross rents of prime space in the Regional Centres managed to continue to nudge up slightly by 0.3% QoQ to $33.94 per sq ft in. Average Monthly Gross Rents of Prime Retail Space (by Micro-market) $ per sq ft per month $45 $40 $35 $30 $25 $20 Visitor Arrivals Source: Colliers International Research YoY Change 2Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2014 Orchard Road Regional Centres 2Q Q Q 2014 Nonetheless, in spite of the cautious sentiment and tenants resistance towards rental hike, the overall activity in the leasing market remained fairly stable, underpinned by the arrival of international brands that set up flagship stores in Singapore. In the premier shopping belt of Orchard Road, Dutch menswear brand Scotch & Soda opened its first stand-alone store measuring 1,350 sq ft in Singapore at Takashimaya Shopping Centre; American beauty brand Fresh also set up its first Singapore stand-alone store at ION Orchard measuring 710 sq ft; and Spanish footwear brand Pretty Ballerinas opened its first Singapore boutique at Paragon Shopping Centre. British tailoring house Gieves & Hawkes also opened its first boutique in Southeast Asia in Paragon. At the same time, unfazed by the challenging operating environment, the F&B scene continued to be abuzz with activities, with new restaurants and eateries popping up in all parts of the island, be it in conventional malls or non-mall locations such as shophouses, commercial spaces beneath the Housing & Development Board (HDB) blocks and the ancillary retail space of commercial buildings. New cafés and eateries that emerged in non-mall locations in include the 30-seat ice cream parlour Workbench Bistro in the Ang Mo Kio housing estate, the 40-seat Wednesday Café along Tanjong Katong Road, the 60-seater casual diner Meat Smith on Telok Ayer Street and the 80-seat café Paddy Hills on South Buona Vista Road, just to name a few. Additionally, international food chains continued to expand their footprint by setting up more outlets in shopping malls. For instance, ice cream chain Haagen-Dazs opened its first concept café in Asia - Haagen-Dazs ION Dessert Bar in ION Orchard and Spanish frozen yogurt chain Llao Llao opened its 12th outlet in Singapore at Wisma Atria. In addition to expansions by existing international food chains, Singapore s F&B scene also saw the entrance of new-to- Singapore brands in. For instance, the award-winning chef and restaurateur David Myers opened its first restaurant in Singapore Adrift at Marina Bay Sands. With the retail operating environment becoming increasingly challenging, it is imperative for existing malls to continuously upgrade to cater to the fast-changing consumer taste and to stay ahead of the competition. Thus, several asset enhancement 2 Research & Forecast Report Retail Colliers International

3 initiatives (AEIs) have been lined up for shopping malls. For instance, CapitaMall Trust (CMT) has announced AEI plans for three malls, including Bukit Panjang Plaza, IMM Building and Tampines Mall, all of which are in the suburbs. In the western region of Singapore, Bukit Panjang Mall is currently undergoing AEI works, which include reconfiguration of space at the third level and relocation of the roof garden. IMM Building, Singapore s largest outlet mall located in Jurong East, will undergo Phase 2 AEI, which entails reconfiguration works on the second storey to increase retail offerings and enhance the outlet. Over at Tampines in the eastern region of Singapore, the proposed AEI for Tampines Mall involves converting the roof area on the fifth floor into a new lettable retail space measuring between 25,000 sq ft and 30,000 sq ft and the reconfiguration of retail units at the second and third levels to enhance fashion offering. Strata-titled retail sales market muted Compared to the relatively healthy leasing activities, the strata-titled retail sales market was muted in the January to March quarter as the impact of the Total Debt Servicing Ratio (TSDR) on the sales of strata-titled retail units became more pronounced in. The enforcement of the TDSR effectively curbed investors ability to finance purchases, and thus dampened investment interest in retail units. According to data available from the Urban Redevelopment Authority s Real Estate Information System (REALIS), only 44 caveats were lodged for strata-titled retail properties in the first 12 weeks of 2015, reflecting a significant decline of 44.3% in transaction volume from the 79 caveats lodged during the same period in 4Q Given the lack of new launches in, new sales or units bought directly from developers plummeted by 56.7% QoQ to a measly 13, or about 29.5% of transactions in the first 12 weeks of In the secondary market, the total number of strata-titled resale transactions during the same period also declined by 37.5% QoQ to 30 caveats in the first 12 weeks of S$ per sq ft Average Capital Values of Prime Retail Space (by Micro-market) $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 2Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 2014 Orchard Road Source: Colliers International Research Regional Centres the average imputed capital value for prime Orchard Road strata-titled retail space dipped by 2.0% QoQ to $6,803 per sq ft in the average imputed capital value for prime Regional Centre retail space stayed unchanged at $4,491 per sq ft since the beginning of Therefore, on the back of declining transaction volume alongside waning investor interest, the QoQ growth in the capital values of prime retail properties in Orchard Road slipped into the negative territory in the three months ending in March After remaining unchanged for seven quarters since 2Q 2013, the average imputed capital value for prime Orchard Road strata-titled retail space dipped by 2.0% QoQ to $6,803 per sq ft in. The capital values for Regional Centres fared better. Supported by its relatively healthy rental market, the average imputed capital value for prime Regional Centre retail space stayed unchanged at $4,491 per sq ft since the beginning of Tourism industry performance to continue affecting retail sales Moving forward, the performance of Singapore s tourism industry will continue to have a bearing on retail sales. To this end, the STB is projecting visitor arrivals for 2015 to be in the range of 15.1 million to 15.5 million a mere 3.0% growth from 2014 s 15.1 million. The corresponding tourism receipt forecast for 2015 is also expected to be moderate, in the region of $23.5 billion to $24.0 billion, up at most 2.0% from the previous year. Given the mild upside projected for the tourism industry, retailers are expected to stay cautious, particularly in view of the challenging operating environment due in part to the labour crunch and its accompanying rise in manpower costs. This will continue to weigh down rents. In addition, the retail property market can expect an injection of some 1.4 million sq ft of new space in The majority or 72.9% of this pipeline supply are located in non-central locations. These include Waterway Point located at Punggol Central / Punggol Walk with an estimated net lettable area (NLA) of about 344,000 sq ft, addition and alteration works at Downtown East on Pasir Ris Close (NLA of about 103,000 sq ft) and The Promenade@Pelikat on Jalan Pelikat (NLA of about 71,000 sq ft). While the new supply in suburban locations should be easily absorbed given that this is spread in different parts of the suburbs and are supported by a ready resident population catchment, those in the Orchard Road micro-market that are dependent on tourists dollars would face keen competition for tenants. This is further exacerbated by the growing popularity of nonmall retail spaces particularly among the entrepreneur type retailers, services and F&B businesses who are lured by the charm and lower rent of street-side shophouse enclaves. Going forward, such alternative spaces are expected to feature more 3 Research & Forecast Report Retail Colliers International

4 prominently in Singapore s retail landscape with the increasing demand by consumers for a hip and differentiated retail experience. Rental and price gap to narrow further Against this backdrop, rents for prime retail space in the Regional Centres are expected to sustain better than those on Orchard Road. Prime ground floor retail space in the Regional Centres is forecast to enjoy rental growth of up to 2%, whereas that in the Orchard Road district is projected to move laterally between -1% and 1% in Prime ground floor retail space in the Regional Centres is forecast to enjoy rental growth of up to 2%, whereas that in the Orchard Road district is projected to move laterally between -1% and 1% in On the strata-titled retail sales front, transaction volume is expected to stay thin for the rest of the year as factors such as TDSR, loan-to-value regulations and impending interest rate hikes will continue to weigh on purchasers decision making processes. While overall prices for strata-titled retail units are expected to ease slightly, those for units located in the suburban locations are expected to hold up better as owners are likely to maintain their price expectations, supported by healthy leasing demand in such locations. As such, the average capital values of prime strata-titled retail space in Orchard Road are expected to ease by up to 5% while those located in the Regional Centres might remain generally flat in the average capital values of prime stratatitled retail space in Orchard Road are expected to ease by up to 5% while those located in the Regional Centres might remain generally flat in Research & Forecast Report Retail Colliers International

5 502 offices in 67 countries on 6 continents United States: 140 Canada: 31 Latin America: 24 Asia: 39 ANZ: 160 EMEA: 108 Contact: Chia Siew Chuin Director singapore.research@colliers.com Colliers International Singapore 1 Raffles Place #45-00 One Raffles Place Singapore TEL FAX RCB No E US$2.3 billion in annual revenue 1.7 billion square feet under management 16,300 professionals and staff About Colliers International Colliers International is a global leader in commercial real estate services, with over 16,300 professionals operating out of more than 502 offices in 67 countries. A subsidiary of FirstService Corporation, Colliers International delivers a full range of services to real estate users, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial real estate firm in the world. colliers.com Copyright 2015 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.