Why real estate investors are turning to Singapore retail

Retail in Singapore is shaping up to be one of the hottest real estate sectors this year, as investors eye rising rents and lower-priced assets.

The fourth quarter of 2023 marked the ninth consecutive quarter of rent growth for prime retail space. Rents grew 0.2% in the fourth quarter compared to a year earlier, according to JLL’s Singapore Property Market Monitor Q4 2023. 

Capital values of prime floor space, meanwhile, remained flat for the sixth straight quarter at S$8,441 ($6,565) per square feet of net lettable area, the report says.

“I think this is the right moment for investors to look into retail, because the prices of assets are lower right now,” says Benjamin Bayon, Regional Solutions Lead, Retail, JLL.

Renewed interest in Orchard Road shopping district

Urban Redevelopment Authority data shows a fall in island-wide retail vacancy rate to 6.5% in the fourth quarter of 2023, from 7.2% in the previous quarter.

Singapore’s Orchard Road shopping district is looking set to be particularly active. The government is in the midst of rejuvenating the country’s prime retail district into a lifestyle destination to draw both tourist and local spending.

The tail end of 2023 closed with two significant transactions for mixed use developments located at or near Orchard Road: VisionCrest Commercial transacted at about S$440 million ($327 million) and Wilkie Edge was sold at about S$348 million ($259 million).

“Mixed use buildings will be of particular focus for investors,” says Bayon.

“The mix of well-selected retail and office offerings, especially in the right locations, should bring about unique experiences that draw more traffic,” says Bayon.

Opportunities to refurbish mixed use developments

Mature retail markets like Singapore will likely begin to see more investors acquiring and refurbishing existing mixed use assets, then reselling them in five to seven years, Bayon says.

This is in part because retail’s relationship with the office is changing, as the role of the office continues to evolve. JLL data says hybrid working remains the preference among employees worldwide, with Singapore employees spending 3.4 days in the office each week.

Mixed use buildings typically comprise of retail on the first few floors and an office tower on top. This layout relies on the flow of office workers navigating between the office tower and the retail podium and making purchases before work, during their lunch break, and at the end of their workday.

“These mixed-use buildings are reporting much less footfall than before,” says Bayon. “Aside from the pandemic changing the way we work, the people who do go into the office are ordering their lunch and their groceries online and bypassing these stores.”

It remains to be seen if these new layouts will yield better traffic in the retail space.

Bayon suggests that for Singapore, the spur in investment activity could mean more mixed-use developments undergoing refurbishment to be aligned with the preference for hybrid working arrangements.

“Instead of trying to fill office vacancies, investors could inject retail spaces into these empty office towers,” says Bayon.

Meanwhile, in developing retail markets such as Thailand and Kuala Lumpur, Bayon says investors are experimenting with new mall layouts to adapt.

“We are starting to see new mixed-use buildings where the separation between retail and office is not so clear,” he says. “We might see with co-working style offices on the same levels as your F&B, fashion, or cosmetics spaces, for example.”

Potential of Singapore’s domestic market

However, challenges remain.

Tourism receipts for 2023 exceeded the Singapore Tourism Board’s S$18 billion target to hit between S$24.5 billion ($18.2 billion) and S$26 billion ($19.3 billion), according to the Singapore Tourism Board.

But arrival numbers are still 30% shy of pre-pandemic figures. The 1.4 million arrival numbers for Chinese tourists pale in comparison to the 2019 peak of 3.6 million, the statutory board reveals.

While the board expects Chinese tourists to remain a key market for Singapore, contributing some S$2.3 billion ($1.7 billion) in 2023, Bayon observes a change in spending behaviour.

“Chinese tourists are visiting Singapore less than before, and those who visit are not spending as much, opting for sightseeing experiences instead,” says Bayon.

To grow sales, Bayon suggests for retail players to look closer to home – the domestic market. Successful tenant mix strategies keep the domestic market’s preferences in mind.

“Instead of waiting for tourists to come and spend their money here, tenants and investors should focus on innovating to please the local market,” says Bayon.

While Singapore may remain the destination for many luxury brands’ flagship stores, Bayon observes a strong market for fast fashion and mid-tier brands.

“This will come from a resilient middle-class and an upper-middle class being careful with their spending,” says Bayon.