For Singapore’s Capitaland, the mall comes roaring back

rents. This year, barring unforeseen setbacks, the company should enjoy a good step up in the latter, too. Despite brave talk by shopping-centre companies, not just in Singapore but globally, about being able to adapt to e-commerce and continue to thrive, behind the scenes they have never been truly comfortable with the e-commerce juggernaut. But as so many e-commerce companies found to their displeasure, 2022 was a year when growth came back to earth and most were forced to lay off significant portions of their workforce. The percentage of sales attributable to e-commerce remained anchored at around 15 per cent throughout the year. Capitaland, which operates 1.1 million sqm of leasable commercial space, most of it in Singapore itself, is now on a different growth trajectory as one of the principal beneficiaries of the new trading environment. Back with a bang Operating metrics for the company’s 26 properties (21 in Singapore) enjoyed a big improvement over 2021 and are now back to par with 2019. Retail occupancy is 98.3 per cent – pretty much as good as it gets for shopping centres.  Retail tenant sales per square metre, the key metric shopping-centre companies and their tenants use to assess how efficiently their space is being used, increased 22.5 per cent on shopper traffic growth of 25.0 per cent, with suburban malls up 11.5 per cent (traffic up 20.0 per cent) and downtown malls up 38.1 per cent (traffic up 31.2 per cent).  Capitaland’s downtown malls and mixed-use properties include exalted destinations such as The Atrium at Orchard, Raffles City and Plaza Singapura. The last of these first opened on Orchard Road in 1974 and was probably the very first air-conditioned mall on the strip.   The portfolio sales growth compares favourably with Singapore retail sales growth, which averaged monthly year-on-year increases of just over 14 per cent throughout 2022. It isn’t possible to say that Capitaland’s malls outpaced the market. A direct comparison is muddied by two factors: Capitaland’s sales include a big chunk of important mall categories entertainment, and food and beverage services, which are excluded from the official Singapore retail sales numbers. Also, Capitaland’s sales are measured per square metre, while national retail sales are not normalised to the quantity of space. Still, Capitaland’s properties demonstrated how strongly physical retail has come back and just how important it is as a social and spending outlet to Singaporeans.  Sales productivity at Capitaland malls improved in most categories, with top categories leisure and entertainment (+127 per cent on 2021, benefiting hugely from a soft comparison because of pandemic restrictions in the base year), shoes and bags (+69 per cent), department stores (+46 per cent), fashion (+36 per cent), sporting goods (+30 per cent), and food and beverage (+28 per cent, also a big beneficiary of a soft base year). Improved sales flowing through to rents In recent years, with retail chains aggressively pruning their real-estate portfolios, sometimes withdrawing completely from national markets, it has become increasingly important for shopping-centre operators to ensure that they are not overly dependent on revenues from one or a small number of tenants. Capitaland has done a good job of reducing its vulnerability in this area: its largest tenants in terms of contribution to revenue are Breadtalk (1.2 per cent) and department store BHG (1.0 per cent). Retail rents are continuing to improve in Orchard Road and other key retail neighbourhoods, supported by a combination of emboldened consumers, returning office workers and the increasing number of tourist arrivals. By the end of the year, arrivals were up by around 80 per cent on the year before, but even so Capitaland is betting that it is unlikely there will be a full return to 2019 levels until 2024. Still, rent reversion (average incoming rents versus average outgoing) at Capitaland’s properties is now up 1.2 per cent, although incoming year-one rents at downtown malls are still down 3.5 per cent on outgoing full-year rents. Retail gross revenue was up 3.9 per cent in the second half and 3.5 per cent for the full year. This flowed through into net property income, which grew by 4.2 per cent in the second half and 4.3 per cent for the full year. The outlook Retailers at Capitaland’s malls still face headwinds in 2023. Part of the reason for a surge in sales toward the latter part of 2022, including a strong December, was the impending increase in the goods and services tax. Households are already hurting from inflation, which was running at 6.6 per cent in January, and retailers are hampered by rising wholesale costs and a tight labour market that makes it difficult to find staff. On the plus side, the supply outlook is good in the sense that retail space will be opening at a slower pace over the next few years than it did before the pandemic. Based on data from CBRE Singapore, new space from 2022-25 will average about 37,000sqm annually, compared with more than 100,000sqm a year from 2017-19. In this muted supply outlook scenario, CBRE expects retail rents to continue recovering.  With rents still nearly 10 per cent below pre-pandemic levels though, CBRE takes the view that now is a good window of opportunity for online retailers to open physical stores at favourable rates. If that materialises, it will be further justification that Singapore’s mall operators are not just talking the talk about adapting and thriving in the e-commerce era; as a practical matter, they’ll be doing exactly what they say.