Singapore retail rents and inflation moving in tandem; Retailers in a Bind
Singapore retail rents and inflation moving in tandem; Retailers in a Bind. According to an Institute of Real Estate and Urban Studies (IREUS) analysis, some retail businesses in Singapore, including those selling recreational goods and furniture, are likely to be hit harder by rising rents and inflationary pressures.
Food, toiletries, and computer retailers, on the other hand, may be more resilient to rising rents.
Historical data show that core inflation, excluding accommodation and private transportation costs, moves in lockstep with overall rents of private-sector shop spaces in Singapore’s Central Region on a quarterly basis.
For example, the rental index increased by 7.1% quarter on quarter in the second quarter of 2007, and then by 8.1% in the third quarter of 2007. Core inflation was also high that year, at 1.8 percent in the third quarter and 2.5 percent in the fourth quarter.
IREUS observed what appears to be a lead-lag relationship between the two time series, which may explain why the positive correlation between core inflation and the retail index is “relatively weak” at 0.28 from Q2 1990 to the first quarter of 2022.
When inflation is high, landlords usually expect interest rates to rise, so they may raise rents to increase their yields, according to Lee Nai Jia, deputy director of the National University of Singapore’s research institute. Rents are contractually locked for a set period of time, with the exception of new tenancies. “As a result, we anticipate that movement will be delayed,” he added.
According to Dr. Lee, some landlords will 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. “That said,” he told The Business Times, “other exogenous drivers, such as new retail space supply, have an impact on retail rents.”
Because landlords may seek to raise rents in order to protect their yields from inflation, the correlation statistics indicate that retailers in some segments may face narrower margins.
IREUS calculated the correlation between the quarter-on-quarter change in sales for each segment and Singapore’s core inflation from Q2 1993 to Q1 2022 using the retail sales index by industry. The correlation was calculated for retail sales at department stores, supermarkets, and hypermarkets from Q2 2008 to Q1 2022.
A positive correlation indicates that rental increases caused by inflation have less of an impact on retail sales in the segment, especially if the correlation exceeds that for rents and inflation.
Food and alcohol sales, cosmetics, toiletries and medical goods, and computer and telecommunications equipment all showed a positive correlation with inflation. As a result, these businesses should be able to withstand higher rents.
In contrast, changes in sales at retailers of recreational goods, as well as furniture and household goods, are negatively correlated with inflation. This means that in an inflationary environment, these businesses are likely to see a drop in sales while paying higher rents.
“While correlation is a crude measure to reflect the relationship between the retail sector and core inflation,” Dr. Lee said, “it provides some interesting observations.” For example, essentials or goods that provide inflation protection are likely to be in higher demand, whereas non-essential durable goods such as furniture have a negative correlation.
“In addition, rising inflation may cause consumers to buy more now rather than later for some goods, explaining the positive correlation,” he added.
To be sure, even if some retailers’ sales volumes increase, this may not be enough to offset rising shipping costs and commodity prices. According to Dr. Lee, 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.
“While landlords may be able to support their real returns by demanding higher rents, this is only a short-term solution.” “Inadvertently, higher rents may push (brick-and-mortar) retailers to e-commerce platforms, weakening future demand for physical shop space,” he said.
Core consumer prices in Singapore continued to rise in April, owing to increases in the cost of food and other goods, as well as electricity and gas. Core inflation inched up to 3.3% last month.
Meanwhile, property analysts predict that retail rents will rise, though they may not return to pre-pandemic levels until 2023. Angelia Phua, director of research and consultancy at JLL Singapore, predicted that prime retail floor space rents would rise by 1.5 to 3.5 percent in 2022.
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