Real Estate

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Singapore's malls are one click away from irrelevance, though the investment trusts that own them are carrying on as if nothing has changed.

The first hint of trouble showed up in January when department store John Little shut down after a 174-year run. Then, in July, Amazon.com Inc. introduced its two-hour Prime Now delivery service, choosing the city-state of 5.6 million people as the testing ground to fine-tune its Southeast Asia ambitions.

The landlords don't appear all that perturbed; at least not yet. CapitaLand Mall Trust, the island's biggest retail real-estate investment trust, announced 2.78 Singapore cents (2 cents) in dividends last week, unchanged from a year earlier. That's an annual yield of almost 5.5 percent at a time when the 10-year Singapore government bond offers only 2.2 percent. The tantalizing premium is keeping investors hooked.

Dividend Checks for Free
Shares of Singapore's biggest mall owner yield 3 percentage points more than the 10-year risk-free government bond
Source: Bloomberg

Even the analyst community is discounting the threat from online shopping: There are 13 buy recommendations on the CapitaLand Mall REIT, and not a single sell, according to data compiled by Bloomberg. But look under the hood, and there are signs that not everything is hunky dory.

While all its malls are almost fully occupied, agreements at some of the bigger properties are being struck at increasingly lower rents. Forget a suburban property like Westgate in Jurong East, which has seen 17 percent of leases signed at rents 10.5 percent cheaper than three years ago; even marquee names like Raffles City, a prime Singapore landmark, are settling for less:

Tenancy Tantrums
Singapore's malls are seeing lease renewals at increasingly lower rents than three years ago
Source: Company presentations
*New rentals versus old rates, typically committed three years ago. Retail leases only for IMM Building and Raffles City; newly created and reconfigured units are excluded.

Singapore's economy grew 4.6 percent in the third quarter from a year earlier, with the government estimating full-year expansion of between 2 percent and 3 percent. Yet CapitaLand Malls' tenants -- from food and fashion to supermarkets and services -- reported negative or mediocre sales growth in the first nine months of 2017. You can expect entertainment and electronics, the categories where tenants are still doing well, to start feeling the Amazon effect when the online service is able to iron out its early wrinkles.

Then there's fintech. By some estimates, the Singapore banking industry's space requirement could shrink by 30 percent, or 6 million square feet, over the next decade. To the extent suburban malls like to house a bank branch or two to catch footfalls, they'll be affected. Indeed, the sharp drop in the rental reversion rate at CapitaLand's Tampines Mall -- from growth of 0.6 percent in the first six months to a decline of 4.3 percent in the first nine -- was because of a change in tenant mix from banking to food and beverages, according to OCBC Investment Research. 

Cheapest in a Decade
Shop rentals in central Singapore are a fifth lower now than just before the collapse of Lehman Brothers
Source: Urban Redevelopment Authority

Ahead of further increases in U.S. borrowing costs, CapitaLand Mall Trust has reduced its balance-sheet risk by selling the serviced-residence part of Funan, a 1980s-vintage mall that used to specialize in electronics and is currently undergoing a costly redevelopment. By the time Funan reopens in 2019, there may not be anybody left on the planet who still goes to a store to buy a computer or a phone. So the new address will play host to everything from a homegrown theater company's auditorium to a test zone for drone photography.

All that "creative intersection" stuff looks nice on paper. But with about half a million square feet, or 8.1 percent of the city's retail space, lying vacant, and an equal amount of new supply under construction, creativity alone may not be enough to fill the Amazonian emptiness that's threatening to engulf this shoppers' paradise.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net