Price growth for strata-titled retail property will likely moderate this year - after spiralling over the last two years to set new records - as the introduction of the total debt servicing ratio (TDSR) curbed investors' ability to finance purchases, property consultants say.
At the same time, they believe that the number of sales transactions may hold up to the levels seen last year, as investors remain keen to snap up shopping space, which has been left untouched by the numerous rounds of property cooling measures.
Alan Cheong, head of research at Savills Singapore, noted that prices for strata-titled retail property rose 11.7 per cent in 2013, after a 10.5 per cent increase in 2012. Much of the price increase last year stemmed from sales sealed in the first few months of the year, before the TDSR kicked in.
Overall, 974 transactions were inked in 2013, 30 per cent fewer than the 1,382 transactions in 2012, noted DTZ.
"In 2013, there were fewer new launches, plus prices had escalated to levels which, together with the imposition of the TDSR, would have raised the investment hurdle for many," said Mr Cheong.
Lee Lay Keng, head of Singapore research at DTZ, believes that the TDSR, coupled with a rule introduced early last year by the Urban Redevelopment Authority (URA) to prevent the proliferation of very small retail units at new developments, reduced the affordability of retail space.
In March last year, URA set a rule stating that the average size of retail units at a new development must be at least 50 square metres (538 square feet).
Price growth of strata retail units this year will therefore be "more moderate", said Ms Lee.
In fact, prices may even fall slightly, as developers could moderate per square foot (psf) charges for new launches to ensure that the overall price quantum remains affordable for buyers, said Mr Cheong.
"The rule stating that average unit sizes have to be 50 sq m would mean that unit sizes available would generally tend to be larger now than before. To sell these units, developers need to ensure that the overall quantum paid remains reasonable, so they may have to reduce the per square foot (psf) prices and not charge $8,000 or $10,000 psf."
That said, he believes that the number of transactions may hold up, with still-healthy interest in retail space.
Sales seen at Junction Nine, which was launched in October last year, provide some insight, he said. Some 124 of the total 146 strata retail units available at the project were sold by the end of the first day of its launch. Prices ranged from $4,500 psf to $5,500 psf for units on the first level, and $3,000-$4,500 psf for those on the second level.
Many of the units sold on the first day of its launch had to be balloted because of demand from more than one party.
"Junction Nine is testament to how there are many people out there who continue to think they can profit from the retail property market," said Mr Cheong.
"While there are going to be fewer new launches this year, the resale market could see a higher number of transactions because many of these older projects have small units that are between 200 and 300 square feet. So demand may be channelled to the resale market," he added.
Interest in the retail property sector increased further early last year after the government introduced cooling measures that targeted the residential and industrial markets, but left commercial property untouched.
What followed was a series of record-breaking deals and robust sales at new launches. In March, a 118 sq ft, street-fronting food & beverage (F&B) unit on the ground floor of Pavilion Square was sold for $10,879 psf, while six other ground-floor F&B units sold at above $10,000 psf. The mixed development had a total of 93 strata retail units, all of which were sold in one day.
The $10,879 psf price is currently the new record for retail space located outside the city and the Orchard Road shopping belt.
The earlier record was set by Alexandra Central, which was launched before Pavilion Square last year. Strata retail units at Alexandra Central were sold for as much as $8,000 psf. Almost all the 116 shops were sold in one day.
Ms Lee noted that demand has been spurred by the launch of developments with small units.
"Due to their smaller sizes, investment quantum for strata retail units tends to be smaller and hence more affordable for investors," she said.
For instance, Pavilion Square's 93 retail units are between 86 sq ft and 926 sq ft in size. The majority of the units are between 108 sq ft and 129 sq ft.
Consultants are mixed on the impact that the higher transaction prices inked last year would have on strata retail rent going forward.
Alice Tan, associate director and head of consultancy and research at Knight Frank, believes that the higher levels of speculation and transaction prices compared with previous years pose the risk of even higher rents for retailers taking up strata space in the near future, once these developments are completed
"Overall retail rents (for both strata and non-strata retail space) have generally exhibited an upward trajectory growth last year," she noted.
However, Letty Lee, director of retail services at CBRE, expects some pressure on the leasing of the strata-titled development projects that have been sold at record prices.
"These strata units will be competing against each other for the same pool of tenants and run the risk of undercutting each other to guarantee an income," she said.
She added that most strata-titled developments are not managed by a central landlord who will manage the tenant mix and direct the concept of the mall. This can typically work against a landlord's ability to negotiate for higher rent.
What could also impact rent is the manpower crunch that has caused many retailers to put expansion plans on hold.
This will affect both strata and non-strata-titled developments.
Said Chua Yang Liang, head of South-east Asia research at Jones Lang LaSalle (JLL): "The labour tightening has had some knock-on effect on retailers, especially those in the F&B sector. Anecdotally, we learnt of several operators who have had to abandon their expansion plans due to labour shortages - primarily because fewer Singaporeans are willing to engage in such service work."
Nonetheless, landlords who have paid top dollar for strata retail units will push for high rents, said Mr Cheong.
"What may happen is that tenants who ultimately take up space at these developments may not last long because they cannot sustain the business due to the high cost. So you may see tenants come and go," he said.