Powering Your Property: Outlook for Retail and Industrial property

Colliers' Director & Head of Research, Tricia Song sat down with Rachel Kelly of MONEY FM 89.3 in a session on Wednesday (3 March) to discuss the retail space and industrial property market's overall outlook in 2021.

2020 saw the total full-year average retail rental decline to 7.2% YoY, while the industrial sector remained relatively resilient. With an economic rebound expected, what is the overall outlook for the retail space and industrial property market in 2021?

Tricia Song, Director & Head of Research sat down with Rachel Kelly of MONEY FM 89.3 to discuss the overall outlook for the retail space and industrial property market in 2021.

Read the transcript for the session below, or listen to the podcast:

Rachel Kelly: How did the retail market fare last year, and what accounted for that performance?

Tricia Song: The retail sales index, excluding motor vehicles, fell 14% for the full year 2020, the worst year in history (since 1986). At the worst point, retail sales index fell 45% YOY in May 2020.

This was mainly due to the circuit breaker lockdown period (7 April to 1 June), where non-essential shops had to be closed physically, impacting the businesses of many retail shops and F&B businesses.

Even when the shops were allowed to open during Phase 2 which is around 19 June, with group gathering limits such as 5 in a group, capacity limits in malls, uncertainties around the economy, it took a while for retail activities to recover. But I am glad to see that by the end of the year, the retail sales index ex-motor sales in December 2020 contracted by just 4.5% YOY.

RK: 2020 saw the total full-year average retail rental decline to 7.2% YoY. What areas were you looking at?

TS: According to Colliers’ in-house data, ground floor retail rents in Orchard road fell 8.4% in 2020 while that of Regional Centres declined 5.7%. As a result, the average retail rents declined 7.2% YOY in 2020.

We are only looking at prime floor spaces which are more attractive to start with. The general retail rents in the Central Region, according to the URA, actually fell 14.7% in 2020, in line with the retail sales index.

Nevertheless, we saw 1.7 million sqft of contraction of demand for retail space, also a record. Vacancy also went up to 8.8% island-wide.

RK: What does that mean for brick-and-mortar retail and retailers? We saw several high-profile retail brand closures, Robinsons for example.

TS: Yes, we did lose a few prominent and homegrown brands like Robinsons, which is unfortunate, but some of these closures are not entirely due to COVID.

Even before COVID, some businesses have struggled due to competition from ecommerce. What COVID did was to accelerate that trend.

If you have not digitaliSed such as go online before the pandemic, or not able to pivot your business fast enough during COVID, cashflows would have been tight and this might just be the last straw that breaks the camel’s back.

Read more: Blurring the lines of Retail

"Though we are still at phase 3, shoppers traffic has recovered 60-70% and tenant sales on average have recovered almost back to pre-COVID levels, especially for suburban malls."

RK: What’s your overall outlook for the retail space this year and which areas are expected to perform?

TS: We think physical retail is still very relevant in Singapore. Look at the post-lockdown recovery, though we are still at phase 3, shoppers traffic has recovered 60-70% and tenant sales on average have recovered almost back to pre-COVID levels, especially for suburban malls.

However, this recovery is uneven. Some trade sectors suffered worse such as travel accessories, work apparel since you can’t travel or don’t go to the office, some sectors also thrived such as supermarkets and convenience stores, computer & telecom equipment, furniture and household items. Sporting goods have thrived as people exercise more, being stuck at home. Entertainment, night spots are still very much closed.

In 2021, we have made progress in vaccines and virus containment, but caution and safe distancing measures will prevail for most of the year. We think Supermarkets, Sporting Goods, F&B will stay resilient. As the world rolls out vaccination, and people ease back to work and normal life, we will probably see more of the cosmetics, toiletries & medical goods, wearing apparel & footwear, jewellery and watches do better.

In terms of geographical areas, prime Orchard Road has seen some domestic shopping pick up the slack from lack of tourists spending -- most of us can’t spend overseas to pamper ourselves, but suburban malls for necessities will continue to perform better.

"As people work from home, there has been an increased demand for broadband, live streaming, cloud computing, and we see more demand for data centres, which are housed in hi-specs industrial space."

RK: For the industrial property market, the research noted that Singapore was relatively resilient in 2020. Tell us more about that.

TS: Yes, back in May last year, we had predicted that manufacturing and the technology sectors will be resilient through COVID, based on both historical trends and nature of crisis, and with that Industrial property would likely benefit.

True enough, the all-industrial rental index declined just 1.5% in 2020 and starting to see increasing trend by the fourth quarter. This is consistent with the economy, the Manufacturing sector grew 7.3% YOY despite the pandemic, due to robust expansion in electronics, biomedical and precision engineering clusters.

As people work from home, there has been an increased demand for broadband, live streaming, cloud computing, and we see more demand for data centres, which are housed in hi-specs industrial space.

Increased R&D, electronics manufacturing should also support high-specs facilities and business parks.

RK: Warehouse rents had surprisingly declined in 2020, albeit marginally, despite higher take-up. Was this surprising?

TS: Yes, this was surprising given the national stockpiling during the circuit breaker lockdown and increased e-Commerce activities.

In fact the take-up was much higher in 2020, and occupancy improved 1.9 percentage points. However, rents still moved down 1.3% for the whole year due to the relatively high vacancy levels, which is about 12% at the beginning of 2020, so there was some excess space. And when the demand comes in, landlords prioritise filling up these space over raising rents, especially during a crisis. Also, some of the spaces are for national stockpiling so rents are probably on the low side.

RK: Where are the bright spots for the industrial property market in 2021?

TS: First of all, e-commerce has accelerated. Online sales as a proportion of total retail sales is 11% in Dec 2020, doubling from 5.8% in Jan 2020. We expect ecommerce will be a long term growth driver for logistics space. With higher occupancies, warehouse space is a bright spot in 2021, and we expect warehouse rents to rise 1-ish % in 2021.

The next bright spot will be high-specs space like data centres and business parks. They will continue to be supported by the growing tech sector, growing demand for digital solutions, and biomedical R&D. High specs factories may also see higher demand from robust semiconductor demand from the 5G and automotive markets, precision engineering and pharmaceuticals manufacturing.

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