ERA Daily Research - 25 June

New norms may emerge in retail sector as sales per square foot of space fall

The Business Times, 25 Jun 2021, Fri 

By Fiona Lam

TRENDS that may emerge in the retail industry include refreshed tenant mixes, shorter and flexible leases, and pop-up stores, while experiential concepts take a back seat.

Sales per square foot (psf) of retail space in Singapore could also become more volatile, said Lee Nai Jia, deputy director of the Institute of Real Estate and Urban Studies (IREUS) at the National University of Singapore.

With psf retail turnover declining, there is uncertainty as to whether sales from physical shops can return to pre-pandemic levels.

"Smaller retailers are less likely to commit to long leases and will prefer flexible contracts that are aligned to their sales turnover. Likewise, pop-up stores may become more popular," he added.

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Compared with other tenants, supermarkets and convenience stores will probably have more bargaining power and be in a strong position to negotiate leases, as they offer stability in sales and revenue for malls, Dr Lee noted.

Furthermore, it remains to be seen whether landlords will continue to focus on the experiential aspect of malls. Before the pandemic, as e-commerce players were grabbing a bigger slice of the market, retail landlords had been rolling out experiential and activity-based concepts to woo shoppers and stay competitive. At the time, malls were providing spaces for people to socialise, and brought in more gyms, family entertainment centres and indoor playgrounds.

"However, these tenants were severely impacted by safe-distancing measures during the pandemic," Dr Lee noted.

Landlords may hence narrow their focus to retail segments that have weathered the Covid-19 storm and performed well in Q3 2020 to Q1 2021, he added. Resilient categories have included essential supplies, furniture, household appliances and computer equipment, which benefitted from the work-from-home trend.

At the same time, categories such as fashion and department stores have become a smaller part of the trade mix at heartland malls.

CBRE research director for South-east Asia, Catherine He, wrote in a report on Wednesday that mall owners need to look at creative ways to fill vacant space as they lose parts of their traditional tenant base.

One way is to incorporate work and living spaces in malls, Ms He said. This will result in a "symbiotic relationship" as it creates additional traffic for the mall and convenience for the users of these workspaces, she added.

IREUS also expects retailers to continue adopting omnichannel marketing, which offers a unified shopping experience via multiple channels.

Given the restrictions under Phase 2 (Heightened Alert) and Phase 3 (Heightened Alert), Dr Lee anticipates quarterly retail psf sales to shrink in tandem with thinner footfall.

This decline may be gentler and turn the corner more quickly than during the "circuit breaker", as shops are open now, he said. However, some retailers' sales volumes may not offset their operating costs. "Rental rebates and wage subsidies are therefore important to help tide retailers over this difficult period," he noted.

The uptick in e-commerce prompted by the latest restrictions could also fail to compensate for the drop in sales at brick-and-mortar stores, similar to what happened during the "circuit breaker", Dr Lee said.

"Amid a muted retail landscape, the Heightened Alert will definitely exert downward pressure on retail rents," he told BT.

In the short run, stricter restrictions including the possible temporary closure of some malls might be imposed from time to time, to contain any resurgence of Covid-19 cases, Dr Lee noted. As a result, retail turnover psf of space could see more volatility in the immediate term, which could drag on for longer if new Covid-19 variants emerge, he said.

Maybank Kim Eng economist Chua Hak Bin earlier predicted that 50 per cent of Singapore's population may be fully vaccinated against Covid-19 by Q3 this year, which could boost the food and beverage and recreation service industries, while the retail sector will likely take off in Q4 when border controls are relaxed.

In the past decade, quarterly psf total retail sales, including motor vehicles, have stayed fairly stable, barring the plunge in Q2 2020 due to the pandemic.

Fluctuations were seasonal, with spikes in sales during the festivities in Q4 each year. However, this belies the dynamics of physical retail, which record lower values if e-commerce and motor vehicle sales are excluded, Dr Lee noted.

When curbs were progressively relaxed, online turnover dipped, but remained above pre-pandemic levels; Q4 2020's estimated online retail sales were about 68 per cent higher than in Q4 2019, and in Q1 2021 they increased 51 per cent year on year.

"These statistics suggest the pandemic has irrevocably changed the retail landscape, with the possibility that online sales will continue to play a bigger role, going forward," Dr Lee said. "Physical retail may hence be unable to return to pre-pandemic levels or previous peaks," he added.


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