Singapore retail rents and inflation moving in tandem; Retailers in a Bind

by Albert02

Singapore retail rents and inflation moving in tandem; Retailers in a Bind

Singapore retail rents and inflation moving in tandem; Retailers in a Bind. SOME retail businesses in Singapore, including those selling recreational goods and furniture, are likely to be hit harder by rising rents and inflationary pressures, according to an Institute of Real Estate and Urban Studies (IREUS) analysis.

Food, toiletries, and computer retailers, on the other hand, may be better able to withstand higher rents.

On a quarterly basis, historical data show that core inflation, which excludes accommodation and private transportation costs, moves in lockstep with overall rents of private-sector shop spaces in Singapore’s Central Region.

For example, in the second quarter of 2007, the rental index increased by 7.1 percent quarter on quarter, and then by 8.1 percent in the third quarter of 2007. That year, core inflation was also high, at 1.8 percent in the third quarter and 2.5 percent in the fourth.

IREUS discovered a lead-lag relationship between the two time series, which could explain why the positive correlation between core inflation and the retail index is “relatively weak” at 0.28 from the second quarter of 1990 to the first quarter of 2022.

According to Lee Nai Jia, deputy director of the National University of Singapore’s research institute, when inflation is high, landlords usually expect interest rates to rise, so they may raise rents to increase their yields. Except for new tenancies, rents are contractually locked for a set period of time. “As a result, we expect the movements to be delayed,” he added.

Some landlords will also adjust rents in response to higher consumption demand and lower unemployment, though due to the time lag, this may not translate immediately into higher prices for goods and services, according to Dr Lee. “That said,” he told The Business Times, “there are other exogenous drivers that impact retail rents, such as new retail space supply.”

Because landlords may seek to raise rents to protect their yields from inflation, correlation statistics suggest that retailers in some segments may face narrower margins.

IREUS used the retail sales index by industry to calculate the correlation between the quarter-on-quarter change in sales for each segment and Singapore’s core inflation from Q2 1993 to Q1 2022. From Q2 2008 to Q1 2022, the correlation was calculated for retail sales at department stores, supermarkets, and hypermarkets.

A positive correlation indicates that rent increases due to inflation have less of an impact on retail sales in the segment, especially if the correlation exceeds the correlation for rents and inflation.

The change in sales for segments such as food and alcohol, cosmetics, toiletries and medical goods, and computer and telecommunications equipment showed a positive correlation with inflation. As a result, these stores are expected to be able to withstand higher rents.

In contrast, the change in sales for retailers of recreational goods, as well as furniture and household equipment, is negatively correlated with inflation. This means that these companies are likely to see a drop in sales while having to pay higher rents in an inflationary environment.

“”While correlation is a crude measure of the relationship between the retail sector and core inflation,” Dr. Lee explained, “it provides some interesting observations.” ” Essentials or goods that protect against inflation, for example, are likely to be in higher demand, whereas non-essential durable goods, such as furniture, have a negative correlation.

“Moreover, rising inflation may cause consumers to purchase more goods now rather than later, explaining the positive correlation,” he added.

To be sure, even if sales volumes increase for some retailers, this may not be enough to offset rising shipping costs and higher commodity prices. And, if landlords are unwilling to share the burden, retailers will likely bear the brunt of rising costs and shrinking profits as consumers become more price-sensitive, according to Dr. Lee.

“While landlords may be able to support their real returns by demanding higher rents, this is only a temporary fix.” “Higher rents may inadvertently push (brick-and-mortar) retailers to e-commerce platforms, weakening future demand for physical shop space,” he said.

Singapore’s core consumer prices rose further in April, owing to increases in the cost of food and other goods, as well as electricity and gas. Last month, core inflation rose to 3.3 percent.

Meanwhile, real estate analysts predict that retail rents will rise, though not to pre-pandemic levels until 2023. JLL Singapore’s Angelia Phua, director of research and consultancy, predicted that prime retail floor space rents would rise by 1.5 to 3.5 percent in 2022.

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