Singapore Retailing - RHB Invest 2017-07-04: Too Many Malls In Singapore?

Singapore Retailing - RHB Invest 2017-07-04: Too Many Malls In Singapore? Singapore Consumer Sector Retail Space Overcapacity BREADTALK GROUP LIMITED 5DA.SI FRASERS CENTREPOINT TRUST J69U.SI DAIRY FARM INT'L HOLDINGS LTD D01.SI SHENG SIONG GROUP LTD OV8.SI STARHILL GLOBAL REIT P40U.SI

Singapore Retailing - Too Many Malls In Singapore?

  • Singapore’s retail market is facing significant challenges, with overall retail sales growth falling into a YoY decline in 1Q17. 
  • Retail occupancy and rent have also been on a declining trend since 2015, while the significant capacity coming onstream over the next few years would likely exacerbate the problem. Many market watchers are asking the valid question of whether there is too much shopping mall space in Singapore. 
  • We believe the underlying issue is not the amount of space, but what mall owners and retailers have to do in order to revive the retail scene in Singapore.

Is There a Structural Overcapacity? 

  • Singapore’s retail market is facing significant challenges, with overall retail sales growth slowing since 2014, and falling into a YoY decline in 1Q17. Retail occupancy and rent have also been on a declining trend during the same period.
  • With a significant number of heartland shopping malls having been completed over the past few years, shoppers are now inundated with too many choices. Many market watchers are asking the valid question of whether there is a structural overcapacity of shopping mall space in Singapore.
  • To have a better idea of whether this is an issue, we performed a snapshot comparison of Singapore’s retail space against other major cities in the region, as well as a time series comparison against previous years.

Retail space per capita 

  • Based on our estimates, Singapore currently has a retail space GFA per capita of 11.6 sqf. Considering the higher population density in Singapore, its status as a top shopping destination in the region, as well as higher per capita income, we think that the relatively higher availability of retail space should not be a surprise.
  • Hong Kong, a similar city, is ranked the highest in this respect, with retail space GFA per capita of 16.3 sqf.

Retail value per sqf (GFA) – How productive is Singapore’s retail space? 

  • Another factor to consider in our opinion, is the retail value per sqf (GFA), which is a representation of how productive the retail space is, in terms of sales. In this aspect, Hong Kong has a value of USD470, which is 33% higher than Singapore’s, despite having more available retail space per capita.
  • This suggests that even though Singapore’s retail space does not appear to have structural overcapacity taking into account its population, the retail space is however relatively unproductive.

Tourist spending is a factor 

  • One major reason supporting Hong Kong’s more productive retail space in our opinion, is due to higher tourism spending. Hong Kong’s international tourism receipts are more than double that of Singapore’s, while international arrivals of 56m in 2016 dwarfed Singapore’s 16m significantly. This can be partly attributed to its proximity to China and the influx of mainland tourists.

Downward Pressure On Retail Rental 

Declining rents since 2015 

  • Retail rental has been on a substantial decline since 2014, in both the central and fringe areas, in line with falling occupancy rates. We believe this may not even reflect the full extent of the decline. 
  • Based on our channel checks, many landlords are now more aggressively offering “non-price” discounts such as rent-free periods, promotion incentives or special rates for temporary pop-up stores (where tenants typically rent for around three months).

Partly due to supply increase in 2014 

  • We believe part of the reason for this rental decline in Singapore is the substantial increase in the supply of retail space in 2014 (to 63m sqf from 61m sqf, or a 3.8% YoY increase), which was not matched by a similar increase in demand. 
  • Going forward, the market would need to further absorb another substantial increase in supply, coming onstream during 2017F-2020F (6.1m sqf or about 10% of 2016’s total retail space).

Several Factors Causing Weak Retail Sales 

  • Weak retail sales extend to the food & beverage sector as well, where retail rents have suffered downward pressure. In our view, the lacklustre retail sales are due to several reasons, including: 
    1. Rising unemployment dampening consumer sentiment; 
    2. Weak consumer sentiment; 
    3. Increasing popularity of e-commerce; 
    4. Similarities between malls.

Rising unemployment and sluggish wage growth 

  • In 2016, unemployment crept up to 2.1% from 1.9%, with long term unemployment numbers registering double-digit YoY growth. 
  • While median income has increased strongly since the Financial Crisis in 2008, it started moderating after 2015 – yet another sign of a weak job market.

Weak consumer sentiment 

  • Given the less-than-robust job market, coupled with low expectations for future wage growth, consumer sentiment has been heavily weighted down. 
  • Mastercard’s consumer confidence study reaffirms this pessimistic view, where it was found that Singaporeans below the age of 30 are relatively neutral when it comes to future employment prospects and outlook on the economy, while Singaporean consumers above the age 30 are very pessimistic. Hence, it is likely that with the lack of job security and low expectations of future wage growth, Singaporean consumers would hold back on spending lavishly.

Increasing popularity of e-commerce 

  • Despite weak retail sales, credit card billings remain strong, growing by 8% YoY in 1Q17. This suggests that some spending may be diverted from traditional store-based retailing (which may involve cash or credit card payments), to online spending (typically involves credit card payments). This can also be seen in Euromonitor’s data, which estimates that non-store retailing has grown further in 2016 to 6.8% of overall retailing, from 5.6% in 2015. 
  • Traction for e-commerce appears to be growing stronger in Singapore, including classified sites like Carousell, which are not typically tracked like normal retail sales.

Similarities between malls 

  • As large mid-tier fashion labels increase their presence in suburban malls, centrally located malls begin to lose their attraction. 
  • In Aug 2015, Uniqlo outlets were only established in seven suburban locations while H&M outlets were in three locations. Since then, these brands have increased their suburban store count to 13 and six respectively. In fact, Uniqlo along with major brands like Victoria Secret and cafe Paris Baguette have closed their centrally-located stores at One Raffles Place.
  • In the past, these large brands provided a certain novelty to mall owners as an anchor tenant to attract footfall and provide recurring rent. However, with these tenants moving into the suburban areas, centrally-located malls have lost that novelty.

Need to revive Singapore’s retail scene. 

  • Other than being a significant contributor to Singapore’s GDP and employment, a vibrant retail scene is an important component of the country’s status as a regional hub aside from being an attractive place for talent. 
  • We believe that retailers and mall owners need to take a collaborative approach to attract shopper traffic, while mall owners should take the opportunity to bring in new or niche retailers to provide greater diversity to shopping malls.

NEUTRAL on retail property sector, selective BUYs on Singapore retailers.

  • With the rising supply of retail space, we expect the retail rental market to remain soft, though suburban malls are likely to outperform in this respect compared to their central counterparts. 
  • Our Top Pick is Frasers Centrepoint Trust (FCT) (FCT SP, Rating: BUY, Target Price: SGD2.22). 
  • On the other hand, Singapore retailers may get a boost to profitability from the softening rental market. We have BUY recommendations on consumer non-cyclical companies – Dairy Farm (DFI SP, Rating: BUY, Target Price: USD10.00) and Sheng Siong (SSG SP, Rating: BUY, Target Price: SGD1.21), where businesses are unaffected by economic cycles, as well as food retailer, BreadTalk (BREAD SP, Rating: BUY, Target Price: SGD1.60), where we expect to see an earnings recovery this year.

Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2017-07-04
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