_The Return of the Strata Retail Market
The original article was published in The Business Times on 6 October 2022.
THE retail sector took a beating from the pandemic-led recession of 2020 and the social mobility restrictions that characterised much of 2021. As the nation pivots to endemic living, the strata-retail market is slowly but steadily trending on the radar of investors, offering a ray of hope that the worst is over.
The year 2011 marked the first time the additional buyer’s stamp duty (ABSD) was implemented to cool the property market, and many investors turned towards strata-titled commercial assets as an alternative to avoid being subject to these stamp duties.
On the back of the ABSD announcement in December 2011, new strata-titled developments that came onstream – such as Alexandra Central, Bugis Cube, and The Promenade@Pelikat – were scooped up by investors as demand for these assets spiked. In 2012, a total value of S$1.9 billion in sales was recorded.
As significant as that was, it was not as sensational as the record-breaking S$2.7 billion notched in 2013, 42.1 per cent more than the preceding year. These two years early in the decade set new highs for the strata retail market, unmatched in the years that followed.
After the peak in 2013, demand for strata retail slowed down as there were fewer project launches with such units and retail investors began to realise that a critical mass of shopper traffic is required for these properties to thrive.
Fast forward to the present. After some two years of struggling with the ravages of Covid-19 and its impact on the retail sector, there are now encouraging signs of a possible rebound for the strata retail market.
Having recorded sales in the range of S$300 million to slightly above S$400 million between 2018 and 2020, 2021 registered an upbeat performance totalling S$512.2 million. This resurgence of interest for strata retail units, in a climate where the retail sector bore the brunt of the pandemic with back-and-forth measures that impeded recovery, signals better days ahead.
In 2022, as Singapore transitions to endemic living, the overall performance of the strata retail market remains sanguine. In the first eight months of the year, a total of 162 units worth some S$452.1 million were sold.
The main hotspots where investors have been active were Districts 7 and 9. Notwithstanding the pandemic, these areas consistently tracked high sales activity in the past five years due to their central location, which have always been popular and keenly watched by savvy investors.
As the borders reopen and safe management measures ease, foot traffic in central areas such as Orchard or the Central Business District (CBD) will receive a shot in the arm thanks to the increasing volume of inbound tourists.
Against this backdrop, sales transactions at Far East Plaza and Lucky Plaza were consistent in 2021 and 2022 thus far, recording the highest volume. Other strata-titled malls such as Sim Lim Square have also managed to cultivate a unique identity that has generated sales transactions, given the niche products and services.
Within the investible strata retail arena, there are two broad categories of strata retail space. One comprises a large strata retail asset (such as Le Quest or Wisteria Mall) that is almost as sizable as a standalone shopping mall, while the other category involves individual unit-size strata lots within a larger development, such as the likes of Lucky Plaza or the former Golden Mile Complex.
Given the substantial difference in size between these two types of strata retail space, the type of investors that each attracts tends to vary as well. As large single strata buildings require larger capital outlay, these often draw institutional investors, while developments that are subdivided into strata retail lots typically appeal to individual retail investors and/or owner-occupiers with more diverse financial profiles.
As large strata retail components of mixed-use developments often have the substantial size of an entire mall and are owned by a sole owner, the property’s identity and trade mix can be carefully curated, taking into account the interests of its immediate shopper catchment. This is done to encourage the best possible footfall with its retail offerings as well as to optimise trade placement and synergies.
Adopting a consumer-centric approach can create a better shopping experience for visitors, especially when supplemented with anchor tenants that are high in demand – such as supermarkets and foodcourts – especially in densely populated residential areas.
Unit-size strata retail space is more assessable to the retail investor. Such investors can include an ordinary layperson looking to diversify their investment portfolio, entrepreneurs setting up their own businesses, or an existing retailer buying their own space to avoid being exposed to retail rental cycles and the unpredictability of landlords.
However, the greater autonomy in a strata-subdivided retail complex without a clear vision or positioning plan can result in disharmonious environments and a lack of an overall identity for the building. Despite this, such free operating structures that are less coordinated can sometimes serendipitously and organically make for its own uniqueness that attracts more destination-based consumers.
Even though the current strata retail market is nowhere near the sales performances recorded in 2012 and 2013, there are promising signs that interest in strata-titled retail space could rekindle in the next 12 to 18 months. While the lingering threat of Covid-19 remains, Singapore has resolutely reopened at a time when revenge travel and shopping is gaining momentum.
And although Singapore has reopened, not every country in the Asia-Pacific has followed suit. It is a matter of time before these larger populations are able to travel unencumbered, which would also benefit Singapore’s tourism and retail growth.
The prospect of riding this wave of recovery is compelling. However, it is imperative that prospective investors carefully evaluate any strata retail opportunity against property attributes of location, accessibility, proximity to transport nodes, catchment profiles as well as complementary trade adjacencies.
If location is important for all real estate assets, it is crucial for retail properties to be able to attract a critical mass of shoppers as the absence of foot traffic and a healthy catchment can spell serious downstream problems.
Additionally, while strata retail owners might be tempted to lease to an occupier with the highest rental offer, a prudent assessment of the sustainability of the business measured against the immediate surroundings would be key to ensuing long-term recurring income and growth.
With the government no longer allowing strata development in certain corridors of the Central Area and strata commercial projects losing favour with developers, it is likely that strata retail properties will become niche investment real estate products in the future.
Hence, such retail assets might gain a stronger following among certain types of buyers, especially those who enjoy the flexibility to choose whether they would prefer to be landlords or occupiers as the economic climate changes from one cycle to the next. Small enterprises and family businesses are also able to better manage control over their strata space with greater operating autonomy and self-governance.
In an age of flexible work arrangements, unutilised space can be sublet for supplementary rental income in times of economic downturn and taken back during periods of organic company growth.
As an investment vehicle, a strata retail unit or even a collection of units is relatively more affordable compared to buying an entire building. Therefore, investment opportunities are open to both individual retail investors with modest appetites as well as established corporate companies eyeing a larger strata retail component of an integrated mixed development.
By Ethan Hsu, Head, Retail and Nor Adila Rahim, Senior Analyst, Research.
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