Independent Retail Market Overview
Economic Growth
After having recorded impressive economic growth figures of around 8.0% per annum between 2004 and 2007, Singapore's real Gross Domestic Product (GDP) growth slowed to 1.1% in 2008 and -2.0% in 2009 as a result of the slowdown in the global economy. However, the economic contraction in 2009 was smaller than initially expected, partly due to the unprecedented policy response from the Singapore Government which spurred domestic demand.
Global economic developments seem to suggest that the worst of the global financial crisis has passed, with most major economies in Asia registering positive growth in the fourth quarter of 2009 (Japan being the notable exception). Looking towards 2010, the Singapore Government expects growth of between 4.5% and 6.5%, being an upgrade from its earlier forecast of 3.0% to 5.0%. Consensus Economics forecasts growth of 5.7% in 2010, continuing at 5.1% in 2011 and 2012.
Although the economic prospects for Singapore in 2010 are good, there are still risks present in the Singapore and global economies, as highlighted by the current concerns over Greece's ability to repay its sovereign debt. A default by Greece or another of Europe's struggling economies, while considered unlikely, would throw global financial markets into disarray once more, and it is likely that Singapore would be adversely affected as a result due to its high level of integration with the global economy.
In an attempt to broaden the nation's economic base, the Singapore Government has outlined an ambitious plan to increase productivity by 2.0% to 3.0% per year for the next 10 years, moving the economy to higher skilled industries. This plan involves a number of tax breaks, grants and subsidies to the value of S$1.1 billion per year for five years aimed at encouraging investment in high-skilled, knowledge-based industries. As productivity increases, so will average incomes, which will have a multiplier effect on the economy due to higher consumption.
Inflation
The Singapore Consumer Price Index grew by 6.5% in 2008 due to high global commodities prices. However, a reduction in global demand caused by the global economic slowdown saw inflation decline to 0.2% in 2009. This included an eight-month period of deflation from April to December 2009.
Increasing global commodity prices, brought on by the expected economic recovery, will lead to inflationary pressure, in particular to the cost of housing and transport. Consensus Economics forecast inflation of 2.5% in 2010, moderating to 2.1% in 2011 and 1.9% in 2012.
Population
In 2009, according to Government data, Singapore had a population of just under 5.0 million people. Of this population, 3.7 million were either citizens or permanent residents. The remaining 25.1% of the population, known as non-residents, are mainly expatriate workers on long term working visas. These workers include both skilled professionals and unskilled workers in manufacturing and construction.
Looking forward, overall population growth is forecast to average 2.0% through to 2012. Growth in the non-resident population, at 3.3% per annum, is expected to be higher than growth in the resident population (1.5%), due to the creation of more employment opportunities as the economy expands. The greater diversity in population enhances the need for a greater variety of retail brands, to adequately meet the needs of a wider variety of consumer tastes.
Tourism
Due to the global economic downturn and the outbreak of H1N1 influenza, total tourist arrivals in 2009 reduced by 9.6% from the previous year to 9.7 million. However, this trend is not expected to continue. The UN World Tourism Organisation says that international tourism arrivals will grow by 3.0% to 4.0% this year. Asia is expected to lead this growth trend with a growth rate of at least 5.0%. This bodes well for Singapore.
Looking ahead, there are many tourism product offerings in the pipeline such as the two integrated resorts (including Universal Studios Singapore), the new International Cruise Terminal, Gardens by the Bay, the National Art Gallery, and the launch of various events. As such, Singapore Tourism Board (STB) expects 11.5 million to 12.5 million visitor arrivals in 2010.
In 2009, tourism receipts are estimated to be in the range of S$12.0 million to S$12.5 million. STB expects this to grow to S$17.5 billion to S$18.5 billion in 2010. Typically tourists account for around 15.0% of retail turnover in Singapore. This is quite a large number by international standards and highlights the importance of tourism to the retail sector in Singapore.
Retail Sales
After a sustained period of strong growth in retail sales, the retail sector experienced a widely expected contraction in sales in 2009. As a result of cautious consumer sentiment and a decline in tourist arrivals, retail sales contracted by 2.1% in 2009. Whilst this contraction was not ideal, it is not of the same magnitude as experienced in the 1998 or 2003 downturns.
Looking forward, 2010 is expected to be a better year, with nominal retail sales growth forecast to be 3.4%. This recovery will be fuelled by a return of consumer confidence, brought about by improving economic conditions, and strong growth in tourist arrivals. Retail sales are expected to improve further in 2011 and 2012, with forecast growth of above 5.0% per annum.
Retail Property Performance
The retail property sector underwent a challenging time in 2009. The economic slowdown, which caused a drop in tourist arrivals and a degree of caution in domestic consumers, made trading conditions difficult. Approximately 2.2 million square feet (sq ft) of new shopping centre floor space entering the market put considerable downward pressure on rentals and occupancy rates.
Average prime rentals for Orchard Road in 2009 were S$36 per sq ft per month, down 10.0% on the previous year, while prime rents for suburban centres were S$31 per sq ft per month, a reduction of 2.0% on 2008. Suburban malls performed relatively better due to their focus on necessity shopping and lower reliance on tourist spending. In the fourth quarter of 2009, average vacancy rates were 5.8% for Orchard Road and 7.3% for suburban centres.
Retail Supply
The total amount of retail net lettable area in Singapore as at 31 December 2009 was 52.8 million sq ft. Around 41.9% of this space, equivalent to 22.1 million sq ft, is estimated to be in shopping centres.
CMT is the largest shopping centre owner in Singapore with 18.0% of the major shopping centre floor space in Singapore (major shopping centres being those over 100,000 sq ft in size).
A significant amount of shopping centre floor space, totalling 2.2 million sq ft, was added to the market in 2009. The majority of this space, some 1.3 million sq ft, was added on Orchard Road, including the new centres ION Orchard, Orchard Central and 313@Somerset.
In the pipeline, there is a further 3.6 million sq ft of shopping centre floor space expected to enter the retail landscape over the next three years. The majority of the new space (around 40.0%) will be added in the central area, including an aggregate 1.1 million sq ft in the two new integrated resorts. Major suburban projects include the 617,000 sq ft centre at Serangoon Central (expected to be completed in early 2011) and a 220,000 sq ft centre at Changi Business Park (scheduled for completion in 2012).
The total amount of shopping centre floor space is forecast to reach 25.7 million sq ft by 2012. Consumers can look forward to more variety and shopping locations given the amount of retail space in the pipeline.
Retail Floor Space Per Capita
The total amount of retail floor space per capita in 2009 is estimated at 10.8 sq ft. This provision is forecast to grow only slightly to reach 11.1 sq ft per person by 2012. At this level, Singapore's retail floor space provision remains low compared to other developed Asian economies, such as Hong Kong, South Korea and Japan. This suggests that, despite the large amount of new supply entering the market, Singapore should be able to comfortably absorb this additional space.
Retail Rental Outlook
Despite improving economic conditions, an aggregate 16.1% increase in shopping centre floor space over the next three years should ensure that the trading environment remains highly competitive in the near term.
Orchard Road rents are forecast to continue to decline by a further 4.0% in 2010 due to the new retail floor space that entered the market in 2009 along with the opening of the integrated resorts in 2010. After these new retail floor space are fully absorbed into the market, we can expect to see a stabilisation of rents in 2011 and a return to positive growth thereafter.
On the suburban front, rents are expected to remain relatively stable in 2010, before increasing in 2011 and 2012. Although we expect to see the completion of several new shopping malls in the suburban market, the community-based nature and accessibility of suburban malls means they continue to be popular with shoppers. Therefore, we are of the view that suburban rents could grow by 2.0% in 2011 and 4.0% in 2012.
Summary & Conclusions
As the global economy continues to recover from the economic crisis, increased consumer expenditure and an improved tourism market should have a positive effect on retail sales in Singapore. With the opening of several new shopping malls, especially on Orchard Road and in the integrated resorts, Singapore will present an exciting mix of retail offerings, which will hopefully encourage higher retail spending from locals and tourists alike. The new supply of retail floor space, however, will limit rental growth in 2010. Nonetheless, with Singapore's relatively low retail space per capita, we believe the supply will be comfortably absorbed by the market over the next two years and rental growth is expected to resume by then.
Peter Holland
Director
Urbis