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Flat sales, lower rents for Singapore's largest mall owner show pressure on retail

SINGAPORE (Nikkei Markets) -- The tepid results of Singapore's largest retail landlord point to a continued struggle for mall owners in the city-state as they battle fast-changing consumer habits and an expected increase in the number of shopping centers.

CapitaLand Mall Trust, which is managed by an indirect wholly-owned subsidiary of CapitaLand, Friday said sales by tenants were flat in the first half of 2017 and it had to settle for lower rents when leases were renewed.

The fall in rents was relatively sharp at two suburban malls where sales tend to be more stable because there are more people living in the vicinity. For instance, Westgate in western Singapore saw rental rates fall 10%, while Bedok Mall in the east saw a 7.4% drop. Retail leases in Singapore are usually renewed every three years.

CMT has stakes in 16 retail properties in Singapore, including Plaza Singapura and Raffles City in the city center.

In all, rents fell by 1.6% for leases that were renewed between January and June, according to data provided by the real estate investment trust.

CMT's distribution per unit rose 0.4% in the second quarter from a year ago while a 1.3% drop in gross revenue to 168.6 million Singapore dollars ($123.5 million) was offset by a larger decline in utilities and maintenance expenses.

CMT said the decrease in gross revenue was mainly due to the loss of income from Funan mall, which ceased operations in July 2016 and is currently being redeveloped.

For the first six months of 2017, CMT's gross revenue fell 2.9% to S$340.7 million while DPU edged up 0.2% to 5.48 Singapore cents. Shopper traffic at its malls rose 0.4% during the period while tenant sales were unchanged on a per square foot basis.

Last week, smaller rival SPH REIT reported a 0.7% increase in DPU while gross revenue rose 1.6% during the three months ended May. SPH REIT, which owns two malls in Singapore, did not provide an estimate of tenant sales but said visitor traffic remained steady in the nine months to May.

Several analysts say the competition from online retailers will heighten in coming months as Amazon is expected to launch a two-hour delivery service in the city state.

Singapore retailers have been hit by tepid sales due to sluggish economic growth and as consumers switch to online sites run by overseas giants such as Amazon and China's Alibaba Group. According to payments company Visa International, e-commerce transactions now account for nearly a quarter of total spending on Visa cards, more than double the 10% seen around five years ago.

The weakness in retail spending has hurt landlords, with data from the Urban Redevelopment Authority showing retail rents fell 2.9% quarter-on-quarter in the first three months of 2017. The vacancy rate for retail properties stood at 7.7% at the end of the first quarter, up from 7.5% in the preceding period.

In a report earlier this month, stockbroking firm RHB said Singapore needs to make better use of its retail space, as Hong Kong's retail value per square foot is 33% higher than the city-state's despite the larger availability of retail space per capita.

While weak consumer sentiment and the growth of e-commerce were partly responsible for the retail slump, malls in Singapore have in general failed to provide niche experiences to differentiate themselves from one another.

RHB said the rents could continue to come under pressure in coming years, with an estimated 6.1 million square feet of new retail space likely to come on-stream between now and 2020, representing about 10% of the current supply.

Prem Shamdasani, associate professor of marketing at NUS Business School, said shopping malls in Singapore need to provide more diverse and exciting experiences to attract shoppers who are increasingly turning to e-commerce for better value and convenience.

According to Shamdasani, suburban malls have some opportunity to convert unoccupied space into hotels or for entertainment, well-being and lifestyle activities as these would attract more locals and tourists looking to do more than shop and dine.

Shamdasani said there was probably a structural over-supply of retail space in Singapore, but the problem could be resolved by falling rentals and mall owners working harder to diversify their tenant mix.

Retail sales in Singapore fell 3.4% last year when automobiles are excluded, continuing the downtrend that started at the end of 2014. Economists exclude motor vehicles when assessing the health of the retail sector as these are determined by government quotas aimed at minimising road congestion.

URA is scheduled to release property data for the second quarter of 2017 next week that will include retail rents and occupancy levels.

--Kevin Lim

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