Singapore’s shopping malls offer the best returns among Asia-Pacific retail investments as economic and demographic growth boost consumption, according to Aviva Plc.
Suburban retail units catering to local resident demand will offer better yields than the central shopping centers, according to Aviva Investors Asia Pte., which manages $2.5 billion in property assets and is a unit of U.K.’s second-biggest insurer. Malls in the island state may yield an average annual return of as much as 8 percent over the next two years, while those in the suburbs may have between 9 percent and 10 percent return annually over the same period, Aviva forecasts.
Investors are betting on Singapore’s economy, which unexpectedly expanded last quarter as services and construction strengthened. Retail sales in Singapore’s central business district could rise 60 percent in the next five years, according to Standard Chartered Plc, while the suburbs will witness an influx of retailers with new malls being completed this year, Colliers International UK Plc forecasts.
“We continue to favor suburban retail in Singapore,” Elysia Tse, senior vice president of strategy and research for Asia Pacific real estate at Aviva Investors, said in an interview. “Retail has been a very stable asset class. The suburban sector is capturing that demographic growth. There’s stable yield and a fairly reasonable growth built into it.”
Australia and New Zealand are ranked second and third by Aviva based on risk-adjusted returns, it said, declining to give specific performances for other markets. Hong Kong, China and Japan are among Aviva’s other top-ranked retail markets.
Aviva’s favorite markets include Australia, Singapore and Japan, which it terms as “necessity retail” where demand from resident consumers will be sustained even if the economic outlook takes a turn for the worse.
Singapore’s gross domestic product rose an annualized 1.8 percent in the three months through March, the Trade Ministry said last month. That compares with an April estimate of a 1.4 percent drop and the median in a Bloomberg News survey for a 1.2 percent contraction. The city’s jobless rate fell to a five-year low in the fourth quarter as companies hired more local workers.
The suburban area is set to benefit from the opening of new malls. Most of the 1.83 million square feet (170,000 square meters) of malls being built will be completed this year mostly in the outskirts, according to Colliers. Jem, a 575,000-square-foot mall in western Singapore will be completed this quarter, while the 426,000-square-foot Westgate is expected to be ready later this year, along with Bedok mall in the east, Colliers said.
“Suburban malls cater to the day-to-day needs of residents staying around the area,” Chia Siew Chuin, director of research & advisory at Colliers, said in an interview. “There is more resilience in terms of footfalls and in turn the probable achievable rentals would be more resilient as well.”
Still, with more than half of all new malls coming up in the outskirts of Singapore, an oversupply may hinder returns, said Tricia Song, an analyst at Barclays Plc in Singapore. Fifty-four percent of the total 4.63 million square feet of retail space will be in the suburbs, she said.
“There is a record supply in the suburbs,” Song said in a telephone interview. “We don’t like the retail sector in the current environment, it’s a defensive bet in a recessionary environment, but if you expect everything to get better then there is no point sticking with retail.”
Rents in the central business district could climb as much as 10 percent per annum, as increased home building in the area will more than double the live-in population by 2017, Standard Chartered Plc said in a note to clients on May 22.
Suntec City Mall will account for 27 percent of Suntec Real Estate Investment Trust’s net property income in 2015 when its renovation is completed, analysts led by Regina Lim at Standard Chartered said. Suntec shares have climbed 2.1 percent this year after last year’s 56 percent advance.
Overseas Union Enterprise Ltd.’s new 160,000-square-foot mall at Shenton Way and its stake in the retail podium at One Raffles Place in the business district could contribute to 15 percent of its income in 2015, according to the report. Overseas Union shares have gained 7.9 percent this year.
Luxury watchmaker Philip Stein opened its largest store in Asia at the Ion Orchard mall in the shopping district, while U.S. furniture and household chain Crate & Barrel opened its first Singapore outlet at the same mall occupying 16,000 square feet, according to Colliers.
Prices for individual retail units along the Orchard Road shopping belt may climb 5 percent this year if the government doesn’t introduce measures that damp the commercial sector, Colliers said.
The average suburban mall is about 99 percent occupied, while the entire retail sector’s occupancy rate was about 97 percent even at a time of the global financial crisis in 2008, according to Aviva’s Tse.
“The retail sector is more attractive to core investors, who have low-risk appetite looking for stable cashflow,” Tse said.