What are the main reasons for the retail space oversupply in Singapore?

This Week's Topic: What are the main reasons behind the oversupply of retail space in Singapore?

Gary Tom
President of Asia-Pacific
Walton International Group

The 2015 Bricks and Clicks Shopper Trends reported that Singaporeans are among the most active online purchasers globally. E-commerce has grown exponentially, taking away shoppers from the malls.

Property developers have also been competing with one another building huge malls, not taking into account the shopping profile and trends to come. The recent proliferation of suburban malls have reduced foot traffic in the city malls.

The rentals charged by developers or the managers of the Reits have risen steadily, thus further compounding the problem. With the declining number of shoppers, high rentals and staff shortage, many retail owners have retreated from having a retail presence to selling their goods online.

Ronald Lee
Managing Director

The oversupply and high vacancy of retail space is a result, first and foremost, of declining economic conditions and consumer confidence.

Against this backdrop, the situation is compounded by high rentals, keen competition from the proliferation of online stores, a fall in tourist arrivals, and more and bigger shopping malls popping up in suburban areas.

Additionally, retail is one of the sectors most affected by the manpower crunch arising from the clampdown on the hiring of foreigners. Therefore, many retail businesses are finding it difficult to hire retail staff in spite of the higher wage costs to attract them, and are choosing to close shop in view of the challenging economic and business climate.

Victor Mills
Chief Executive
Singapore International Chamber of Commerce

For years the retail sector expanded cannibalising its market by opening more stores in more malls which often sold the same or very similar goods. The sector is now experiencing tough times due to the effects of rising rentals, gloomy economic news constricting consumer spending and by a widespread change in consumer behaviour.

Many people no longer buy from physical stores and shops. They prefer to shop online. These factors, compounded by the small size of our domestic market, bring many challenges to the sector. There are many opportunities too to differentiate, to downsize and to exploit e-commerce.

Tan Boon Yen
The Institute of Internal Auditors

The shopping scene is facing a paradigm shift. The notion that customers walk into a store, browse, and purchase, no longer applies today. With online shopping, customers can browse and buy, right in their seat. Technology has inevitably transformed the landscape and retail shops cannot just be places where transactions are made any more.

Keeping in mind increased labour costs, tightened foreign staff quotas and an uncertain economy, the reality is that the business model for the retail sector, especially brick-and-mortar shops, has to change. Until the mall and real estate investment trust (Reit) managers, the Singapore Retailers Association and retailers collaborate to resolve the situation, it will be a long while before the retail gloom returns to a boom again.

Patrick Sim
Senior Vice-President
Orange Business Services,

As consumers in Asia rapidly turn to e-commerce, brick-and mortar retailers face new pressures in attracting human traffic. Shoppers have become savvier, researching potential purchases online before selecting from a myriad of online retailers for the best deal.

With the oversupply of retail space here, it seems that many retailers in Singapore are not equipped to handle the double whammy of the threats of online shopping and high overhead costs.

In order to turn back the tide, traditional retailers can resort to digital solutions to complement in-store strengths. For example, a brick-and-mortar retailer can set up an online shop which will allow it to expand its product selection, as well as serve customers round the clock.

The physical store can also be fitted with interactive storefront windows that offer limited time discounts exclusive to walk-in customers in order to attract footfall.

Additionally, the store can focus on providing more personalised customer service, such as accessing a customer's purchase history, to showcase recommended pieces in the customer's size and style.

So brick-and-mortar retailers can leverage e-commerce to face the competition. By creating a holistic and integrated online-to-offline shopping experience, more and more retailers are turning adversity into opportunity.

Andrea Bonardi
Managing Partner
Texere Advisors

The high vacancy rate of retail space in Orchard Road is due as much to the economic slowdown as to the average quality of retail space. Shopping malls should adapt to increasingly sophisticated customers looking for experiential shopping and an engaging retail environment in which to spend time and shop. Vacancy rates fall - to zero, too - in malls which are able to change and evolve along with shoppers' tastes and preferences.

The higher quality of retail malls in neighbouring countries, such as Thailand or Malaysia, has also reduced the competitive advantage once enjoyed by Singapore, thus reducing tourists' appetite for shopping here.

Paul Lim
Chief Executive Officer
Secura Group Ltd

The writing has been on the wall. The decline of mainstream retail can be explained by Reits, lack of transparency and online retailing. Most of the retail space in Singapore is owned by Reits whose singular objective is to maximise profits in the short to mid-term.

To achieve this, the managers have repeatedly raised rents and maximised rental space through conversion of common spaces. The leasing model adopted is often based on a fixed rental plus a percentage of sales.

Retail businesses bear the full risk of failure, while the Reits eat up a large chunk of their profits, followed often by ransoming for higher rents when the lease expires.

The lack of transparency in retail rental leases makes it difficult for businesses to make informed leasing decisions. Having publicly available retail lease data akin to the URA (Urban Redevelopment Authority) residential lease data will be very helpful. The final straw that broke the camel's back is the onslaught of online retailing.

The only retailers in the future will be those who successfully innovate both their products and mode of business delivery, leveraging on new technology that includes the Internet of Things and Big Data.

Lim Soon Hock
Managing Director

The biggest problem is that investing in real estate is still considered to be a relatively easy way of making money. This is despite the government's property cooling measures and Singapore's limited retail and consumer market.

Together with Reits, this inevitably leads to an oversupply of retail space. That there is now much empty retail space is partly self-created by players in the real estate industry.

Mall owners not only have to find new uses for the vacant retail space on an urgent basis, but will also have to compete with e-commerce that is disrupting the brick-and-mortar industry.

Pauline Goh
CEO, Singapore and South-east Asia

In an upcycle, developers would have been confident of a high take-up of space in shopping malls ahead of completion. An additional 1.6 million square feet of retail space coming onstream this year, and another 1.5 million square feet scheduled for completion next year, would have been manageable.

However, labour constraints and weak retail performance have impacted retail space demand. The market is restructuring, and retailers are adapting to a slowdown in population growth with the cut in foreigners, rising rents, and a sustained manpower crunch owing to regulations around foreign labour restrictions.

Added to the mix is the emergence of e-commerce, the strengthening Singapore dollar which has prompted Singaporeans to shop outside the country, either physically or electronically, as well as a general malaise in spending on physical goods in pursuit of experiences instead.

Still, the fundamentals remain strong. Singapore maintains its top retail destination ranking for many global brands, according to our latest research.

Robin C Lee
Group COO
Bok Seng Group

A lacklustre economy, unsustainable rental return expectations, the meteoric rise in popularity of online shopping and the hasty overbuilding of ubiquitous malls have all led to the oversupply of retail space in Singapore today. There is little distinction from mall to mall; many share the same common food and beverage (F&B) and retail chains.

With economies of scale, these bigger tenants are able to leverage better rental deals while the smaller unique retailers struggle to fight for space and affordability.

This disparity is further widened by competitors in the cloud, the difficulties of hiring good sales staff and a need to operate long hours to remain remotely competitive. There is really very little motivation to be toiling in retail.

Perhaps the Orchard Road vacancy rate of 8.8 per cent is still bearable for some landlords and they'd rather keep it empty then compromise on rates. But a mall with floors of closed shops is a very sorry sight and a turn-off to shoppers.

Yuko Saito
Managing Director Criteo South-east Asia, Hong Kong,
India and Taiwan

Retail spending has shifted online because of lower prices, greater convenience and a broader selection. But a physical store presence will remain relevant as consumers still desire to touch or sample a product before buying.

As consumers increasingly expect retailers to deliver a seamless shopping experience that includes personalised search and payments, offline and online shopping will no longer be separate business models but an integrated experience.

Mobile technology will be the enabler of these experiences. Shoppers will soon peruse items in-store and order them on smartphones for home delivery. Retailers will invest in mobile apps and demand smaller store spaces as fulfilment gets facilitated from warehouses. Malls must, therefore, adjust to this new wave of change.

Thomas Wai
Director, Asia-Pacific
Talent Plus, Inc

Today's retail oversupply situation is largely driven by the significant and quick drop in demand for space. Some of the reasons are our small home market, listless growth in tourism arrivals, rising rentals, labour crunch and changes in consumers' buying habits.

Consumers today not only shop at retail stores, but also shop online, aggregate purchases and buy in bulk overseas. These factors cut into the margins of retailers. Unfortunately, retailers respond to these challenges by downsizing their space demand, rather than strategising on how to create better experiences to engage their consumers. We need more growth strategies, rather than cost-saving tactics.

David Leong
Managing Director
PeopleWorldwide Consulting Pte Ltd

The emergence of online stores with virtually all kinds of merchandise at much-discounted prices, and the growing popularity of online purchases, have contributed to the woes of brick-and-mortar retail stores. Hence, vacant shops in downtown malls have become a painful reality.

Retail stores must morph into self-collection centres for online purchases or a place for consumers to feel and touch the actual merchandise, or they are unlikely to survive as a purely physical retail store.

The oversupply of retail space will be a short-term phenomenon as stores become online retail extensions but I am certain that retail property prices will slip. Shopping habits and experiences have changed, and retail space use must evolve to better serve consumers.

David Emery
Founder and Chairman
Reciprocus International Pte Ltd

In the first quarter this year, there were 4.7 million square feet of vacant retail space - equivalent to five VivoCity shopping malls. Many retail outlets in these spanking and upgraded malls try to create a conducive shopping experience to lure the customers in.

However, high rental prices and increased labour costs are causing prices of food, products and services to escalate. In addition, e-commerce is booming in Singapore, further threatening brick-and-mortar shops. Not least, the challenging economic environment and weak consumer sentiment is also taking its toll. The result is dwindling customer numbers and empty shops.

Landlords and retailers need to work together and innovate towards a new direction to give shopping malls and retail outlets a fresh vibe. Only then will customers walk in, consume services and F&B products, and walk out with shopping bags.

Annie Yap
Group Managing Director
AYP Group

Singapore's economic downturn has impacted the property market. Retailers cannot sustain their business and are closing their shops. This may be due to several reasons.

Firstly, a decrease in visitors patronising the stores. The Singapore Tourism Board reported a 3.1 per cent fall in visitor arrivals to 15.1 million last year. Retail stores also face challenges such as rising rents and labour shortages. Another reason for decreased retail sales could be that, with low-cost travel, many Singaporeans now shop overseas. Lastly, the shift to online shopping has also affected brick-and-mortar stores.

Rohith Murthy
Managing Director

Market conditions here are in a bit of a slump so companies are cutting back on hiring, and even downsizing their expat staff. Consumer sentiment is weak and Singaporeans, Singapore residents and tourists alike are cutting back on non-essential spending, especially shopping. People are also making purchases online.

As a result, we literally have fewer people even window-shopping in the malls. Many retailers who opened brick-and-mortar stores after the 2008 financial crisis are now facing hard times. However, like in any market cycle, rebounds can start happening from next year, and retail sentiment could start turning positive again.

Kevin Wo
Senior Vice-President and General Manager, ASEAN

In today's increasingly connected world, retailers are embracing digital technologies to enhance the experience of their customers and respond to their demands for instant, tailored information. For example, we are seeing clients harness innovations such as self-service kiosks and hand-held mobile devices to improve in-store interactions, and using sensors to detect customer traffic and analyse consumer behaviours.

The future for these retailers is bright, but they will necessarily prefer store spaces with the right infrastructure to support digitisation and a delightful customer experience. Retail spaces that don't enable a digitally connected customer experience will inevitably become moribund.

Melanie Lim
Managing Director
Builders Hub Pte Ltd

One key reason is there are too many malls, especially in the suburban heartland too. The oversupply may also be due to poor market sentiment; everyone has to tighten their belts. Retail rentals are also high.

This article was first published on May 9, 2016.
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