Prime retail rents kept in check in 3Q 2014

Research & Forecast Report Singapore Retail 3Q 2014 Prime retail rents kept in check in 3Q 2014 Accelerating success. Performance of Tourism Industry Despite healthy leasing activity, declining tourist arrivals that took a heavy toll on retail spending kept Singapore s prime retail rents in check in 3Q 2014. Declining tourist arrivals took a heavy toll on retail spending Visitor arrivals in Singapore softened by 2.5% year-on-year (YoY) to 8.9 million in the first seven months of 2014. The chief reason for the decrease was the falling number of Chinese visitors, which plummeted by a very substantial 29.4% YoY during the January to July period. Excluding visitors from China, visitor arrivals in Singapore would have been up 2.7%, according to the latest data from the Singapore Tourism Board (STB). The new tourism laws in China (implemented in October 2013) clamped down on zero-dollar tours that hit tourists with surprise fees. Together with the disappearance of Malaysia Airlines flight MH370 in March 2014, political tensions in Thailand in the earlier part of the year and the spate of kidnappings of Chinese nationals in Sabah, Malaysia, tourism demand from China has been negatively affected. Typically, Chinese tourists combine their visits to Malaysia, Singapore and Thailand as part of a multi-country tour. Source: Singapore Tourism Board/Colliers International Research The downward trend of Chinese visitors has placed a notable drag on retail sales, to the point of affecting retail sales during the Great Singapore Sale (GSS). Retail sales (excluding motor vehicles) have recorded negative YoY growth since April 2014, falling by 2.0% in that month, 0.8% in May, 3.0% in June and 1.3% in July. Retail Sales Performance (Excluding Motor Vehicles) Aside from just two months of YoY increases, in January and February, visitor arrivals have been on the decline in 2014, falling in consecutive months by 5.2% in March, 2.3% in April, 6.2% in May, 8.4% in June and 0.9% in July. Source: Singapore Department of Statistics/Colliers International Research

The latest retail sales statistics in July show that discretionary consumer categories such as recreational goods, watches and jewellery, as well as telecommunication apparatus and computers registered decreases of 8.2%, 4.7% and 2.6%, respectively, compared with figures in the same period a year ago. The falls in these categories were partly contributed by the decline in Chinese visitor arrivals, notwithstanding the promotions available during the GSS. Retail operators resist further rental increases The decrease in tourist volume and lacklustre retail sales have and continue to exacerbate an already highly challenging and competitive trading environment. This has made for longer tenant negotiations, where retail operators are resisting further rental increases. The average monthly gross rent for prime retail space in Orchard Road softened slightly by 0.5% from the $36.42 per sq ft recorded in 2Q 2014 to $36.25 per sq ft in 3Q 2014. However, the average monthly gross rent of prime retail space in the Regional Centres gained a slight 0.3% from the preceding quarter s level of $33.61 per sq ft to $33.72 per sq ft, during the same period. Given the dependency of Orchard Road malls on the tourist dollar, contrasted against the steady flow of local resident shoppers walking into Regional Centres daily, the rental premium that prime retail space in Orchard Road commands over similar space in the Regional Centres narrowed further from 8.4% as of the end of June 2014 to 7.5% as of 3Q 2014. Average Monthly Gross Rents of Prime Retail Space (by Micro-market) Source: Colliers International Research The average monthly gross rent for prime retail space in Orchard Road softened slightly by 0.5%... in 2Q 2014 to $36.25 per sq ft in 3Q 2014 the average monthly gross rent of prime retail space in the Regional Centres gained a slight 0.3% from the preceding quarter s level to $33.72 per sq ft. In spite of the challenging environment leasing activity remains healthy In spite of tapering local and tourist spending, the challenges of increasing costs, a tight labour market and a highly competitive trading environment, leasing activity in Singapore remains healthy with the debut of new brands and the expansion of existing ones. In 3Q 2014, prominent established and new-to-market Japanese retailers set up shop in Singapore. Japanese retail brand, Muji, opened its flagship outlet at VivoCity and a concept store at Changi Airport Terminal 2 in July, with plans to expand further into Orchard Road beyond its three outlets there. Muji is also considering a greater heartland presence. The flagship outlet at VivoCity is Muji s largest in Singapore, measuring around 6,500 sq ft, while at Changi Airport, the new store caters to travellers. Tokyu Hands Inc., a Japanese lifestyle store known for quirky homeware products and do-it-yourself items opened a 7,500 sq ft store at Westgate in Jurong East in September. This is the second overseas store under the Tokyu Hands label, following the opening of its Shanghai outlet in 2012. American sports brand Under Armour also expanded its footprint in Singapore, opening its second and third standalone stores at Collyer Quay and Tampines 1 in August. Under Armour previously opened its first store at Orchard Gateway in May this year. In addition, in August, heritage brand Church s opened a 1,001-sq ft boutique at The Shoppes at Marina Bay Sands. Moreover, Dutch label Suitsupply opened its first store in Singapore, spanning 5,500 sq ft at Ion Orchard, towards the end of September. Across the island, new eateries boasting diverse food & beverage (F&B) concepts and cuisines continue to open in all manner of locations during the quarter. The spirit of enterprise remains strong among locals trying their hand in the F&B business, with the openings of lobster joint, Pince and Pints at Duxton Road, Japanese-French restaurant and bar, Babette in the Parc Sovereign Hotel at Tyrwhitt Road and The 1925 Microbrewery and Restaurant at a shophouse in Jalan Besar. New F&B outlets could also be found opening in malls, with the opening of the 72-seat pizza bar, Alt Pizza, at Suntec City, the Thai-Chinese restaurant Khun Mee Thai at Bedok Point and the 20-seat café Eighty Days at the Marina Bay Link Mall. The challenging retail environment has also spurred landlords to become more progressive and proactive in managing their tenancy mix to offer a wider variety and a more positive shopping experience. Shopping mall JCube in Jurong East added around 50 stores in a new 10,000 sq ft zone inspired by the popular Harajuku and Hongdae shopping districts found in Tokyo and Seoul. Named J.Avenue, this zone features about 70 shops selling items such as fashion apparel and accessories. At Jurong Point in Boon Lay, the Mongkok precinct, which is conceptualised to look like the iconic district in Hong Kong, features more than 50 F&B options and retail shops. It was reported that by the end of 2014, about six other precincts in 2 Research & Forecast Report 3Q 2014 Retail Colliers International

Jurong Point, including a Japanese-inspired Ginza precinct, would have undergone renovation and repositioning. Strata-titled retail property sales remain muted In comparison to the still active leasing market, the strata-titled sales market remained fairly quiet during the July to September 2014 period. 117 caveats were lodged in the first 11 weeks of 3Q 2014 for strata-titled retail premises, according to the Urban Redevelopment Authority s (URA) Real Estate Information System (REALIS). New sales bought directly from developers of yet-to-be built properties accounted for 78 transactions, or about 66.7% of transactions from July to September. Additionally, new sales in 3Q 2014 also comprised units from the mixed-residential-andretail development City Gate at Beach Road. Launched in late July with prices ranging between $2,900 per sq ft and $6,500 per sq ft, it was reported that 62 commercial units were sold at City Gate during the first weekend out of 155 units launched. However, the caveats from these sales have yet to be recorded in URA s REALIS system. With investment interest in retail units remaining languid, and with overall demand volumes dropping, capital values remained flat in the quarter ending in September 2014. The average imputed capital value for prime Orchard Road stratatitled retail space remained at $6,942 per sq ft in 3Q 2014, unchanged for the past six quarters. In decentralised locations, the average imputed capital value for prime Regional Centre retail space was unchanged for three quarters, remaining stable at $4,491 per sq ft during the quarter. Average Capital Values of Prime Retail Space (by Micro-market) Competition from e-commerce retailers The brick-and-mortar retail trading environment has been and will continue to remain tough and demanding on retailers and F&B operators. As if the combined factors of rising costs, shrinking profits, tighter foreign worker policies and difficulties in hiring staff were not enough, operators also face competition from e-commerce retailers and online food delivery services. While many Singaporean consumers still seek the physical retail experience of seeing, touching and trying on desired products, the steadily increasing online shopping trend could eventually change the face of traditional retail, consequently putting substantial pressure on the customary operating practices of brick-and-mortar shops. These difficulties are inherently more acute for smaller brands, and these would be among the first casualties to exit the retail industry. The larger international brands such as the fastfashion houses of Uniqlo and H&M would be able to weather the pervasive problems in the retail sector better. Given the Darwinian survival-of-the fittest nature of the current retail sector, shopping malls might evolve to be primarily occupied and dominated by the stronger and larger brands. Rent and price movements are expected to remain stable Nevertheless, notwithstanding the tentative retail sales, Singapore will continue to draw new retail brands to its shores. Existing international brands with financial muscle will also look towards further expansion. As such, retail rents are expected to remain stable for the rest of 2014. With greater pressure in Orchard Road due to the premier shopping belt s dependency on tourist patronage, the average monthly gross rent for prime ground floor retail space could end the year 2014 within a range of -1% to 0%. Regional Centres could exhibit comparatively better rental growth of between 1% and 2% for the whole of 2014. Source: Colliers International Research The average capital value for prime Orchard Road and Regional Centre strata-titled retail space remained unchanged in 3Q 2014. In Orchard Road the average monthly gross rent for prime ground floor retail space could end the year 2014 within a range of -1% to 0%. Regional Centres could exhibit comparatively better rental growth of between 1% and 2% for the whole of 2014. In the strata-titled retail space market (including those in mixed-use developments), capital values are expected to continue to trend laterally in the last quarter of 2014, with activity likely to remain similar to much of 2014 to date, wherein demand and transaction volume have been largely muted. 3 Research & Forecast Report 3Q 2014 Retail Colliers International

In the strata-titled retail space market (including those in mixed-use developments), capital values are expected to continue to trend laterally in the last quarter of 2014 wherein demand and transaction volume have been largely muted. 4 Research & Forecast Report 3Q 2014 Retail Colliers International

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