Retail rent growth needs more push for recovery: UBS

The increase in rents is marginal, ranging from 0.5-1.4% YoY as at Q2 2018.

The worst seems to be over for the retail market given that average rents across all sub-markets have come off the bottom seen in Q2 2017, according to UBS Asset Management’s 2019 real estate outlook. However, this does not yet signify that the retail sector is out of the woods given that the increase in rents is marginal, ranging from 0.5-1.4% YoY as at Q2 2018, the report highlighted.

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“The exception is the city fringe market where rents have not budged since bottoming in Q2 2017. Three new malls totaling 1.25 million sqft are expected to be completed in 2019, representing roughly 2% of total stock but this is unlikely to represent major supply pressure given that precommitment rates are high at 70-90%,” the report’s authors Adeline Chan and Shaowei Toh explained.

Supply growth is expected to taper off significantly post-2019, which removes completions as a downside risk. That being said, retailers continue to face labor shortage and high operating costs, and may be more likely to concentrate their efforts on selected well-performing stores than to be in a hurry to expand.

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Demand for space was observed to stem from activity-based or experiential tenants, with some malls, particularly those in the city area, turning to coworking operators to fill up vacant space. “While this represents a new source of take-up, the trend is emblematic of a generally downbeat retail market,” Chan and Toh noted. “Nevertheless, malls still cater to a fundamental need, and asset selection is key to outperformance.”