The resurgence of Singapore retail 1 comments

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The subprime crisis and the many malicious tentacles extending from it (the chief one being inflation) have dominated (negative) global attention over the past year but I feel several themes have receded into the background as a result though they still remain compelling stories in their own right. One of them is the remaking of Singapore.

Make no mistake, this is one big story in the making. When you have record construction book orders for several years in a row that is driven by a single-minded governmental drive to reposition from manufacturing to services and consumption, it will generate a displacement effect that benefits certain sectors and affects others in a significant way. A likely beneficiary will be retail, as highlighted in my writeup at the start of 2008: Fundamental Trends to Watch for 2008.

Retail was huge in the 1980s and early 1990s, driven by Singapore's emerging status as a tourism and aviation hub amid the bustling tiger economies of Southeast Asia. They were also the years when infrastructure buildup was strong --- the key one being the MRT, and we had free-spending Japanese tourists as the main foreign spenders while locals' spending power grew prodigiously through a 20-30 year boom period. It was a multi-year secular theme and the hot stocks were retail, hotels, property and construction. It was an era when among the ten richest men was a retail tycoon (the boss of CK Tang).

The local retail industry has had moribund growth since then, affected by several developments: the Asian financial crisis that hit our neighbouring countries hard, miscellaneous crises (911, SARS) and recessions that affected domestic and tourist consumption, plus a shopped-out Singapore consumer that increasingly went overseas in search of cheaper goods given the advent of budget carriers.

While we constantly hear about the problems of retailers (high rent, strong competition), it is worth noting that on the demand side, the locals' spending power and their willingness to spend has never weakened. This is clear from continually rising incomes which now brings us above the median of developed world per capita incomes, and the success of well-placed suburban malls like Jurong Point, the malls at Tampines, and the recently-built Vivocity, which depend mainly on locals' spending. Suburban malls comprise about half of Singapore's retail space. Implict government targets to increase population to 6 million from the current 4.5 million, from both newbirths and immigration, bodes well for future demand at these malls.

Meanwhile, tourist arrivals have been growing steadily over the years and is set to undergo a quantum jump over the next 1-2 years as the two IRs at Sentosa and Marina are completed and as a more subtle multi-pronged approach is launched to attract tourists, including medical tourism, event-driven tourists (MICE and F1 Grand Prix) and enhancing Singapore's hub status (eg. Singapore Cruise Centre). The STB's target --- to triple tourism receipts to $30B and double tourist arrivals to 17M (set in 2005) --- would have implied >10% annual growth for the retail industry if it materialised.

In terms of retail space supply, there is approximately 7 sq ft of available retail space per capita in Singapore as at end 2007. This is similar to Malaysia's Klang Valley but only half of close competitor Hong Kong's ratio of about 16 sq ft per capita, suggesting there could be further growth before saturation. One of the observations that is unique about retail property (especially in the prime areas) is that supply generates demand, as a critical mass generates a reputation and a niche which attracts the fashion-conscious and the affluent who place variety above all other factors in importance (which is why I favour the prospects of retail property even as I am pessimistic about the rest). Driven by the strong growth potential in the Asia-Pacific that has emerged in recent years and their hunger for higher-end goods, Western retailers have increasingly expanded in this region to secure their beachheads and mindshare and Singapore is likely to benefit from this region-wide trend (it is often seen as a launching pad for further expansion). Islandwide retail space occupancy rate has consistently exceeded 90% over the last few years, and rental rates have grown strongly while still attracting takers. For a striking example, prime rental rates along Orchard Road have been in the region of $40-50 psf/month, and I just read that the new iON Orchard is quoting $80 psf/month without any problems attracting bidders. It suggests that there should not be an oversupply of retail space in the prime Orchard Road stretch even with the coming up of new malls like Orchard Central and Somerset Central.

The likely strong growth in tourism receipts would benefit some more than others. Retailers in the Central Region would benefit more compared to suburban malls, while luxury retailers would likely benefit more as well. It is worth noting that among the stronger retail segments according to the Department of Statistics have been wearing apparel and footwear, watches and jewellery, and department stores.

This is not a sure-win story. Retail could yet remain in the doldrums due to a global recession, though in such a scenario none would be spared. But in the more likely scenario --- a less serious slowdown, it is likely that consumers will scrimp on the bigger-ticket items which would require loans, such as property and cars (both of which are already seeing negative growth), while still continuing to spend on consumer goods which are more a function of their incomes/income growth (which should be steadier). Hence retail looks like a better play than other sectors (eg. property) in a "remaking of Singapore" theme.

There are several sub-sectors within the retail sector that look interesting. I have a Retail Sector Index where one can check out the component stocks. One could adopt a Peter Lynch approach by checking out crowd traffic at various malls to assess the popularity of various brand outlets. Personally, I feel that retail outlet outfitters (which benefit from new mall expansions), popular luxury label owners and mall owners (in an environment of floorspace pricing power) all look interesting.

Two things stand out for me, stock market-wise. Firstly, the retail sector has not really surfaced as a hot sector through the last few boom years (though miscellaneous retail stocks have done well), as indicated by the trend of my Retail Sector Index ---- a bullish sign. Secondly, there have been institutional and private investor interest in local retail stocks, as evidenced by recent takeover and privatisation deals --- Royal Sporting House and Robinsons (by Arabs), Sincere Watch, CK Tang (unsuccessful privatisation), Guthrie GTS (partial privatisation), Courts (ongoing) ..... what's next?

References:
(1) Retail Outlook 2007- Opportunities and challenges ahead
(2) Property Report Asia Jul 2008: Singapore retail property highlights