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ION Orchard raises the stakes in shopping-mall game


The Edge, October 19, 2009


Jocelyn Poh, 32, has been visiting ION Orchard at least twice a week since it opened on July 21. The mother of two, who works for a US bank, often dines with friends or family at the new, upmarket mall on weekday evenings. And, she likes browsing through the shops on weekends with her husband in tow.

With stores ranging from the upscale Louis Vuitton on the upper floors to the likes of Uniqlo and Watsons in the bowels of the building, ION Orchard has become a new focal point for shoppers on Orchard Road.

Among its 335 stores are top-end and mass market brands that shoppers like Poh have loved for years, as well as a few that are new to this market like Callate La Boca (which translates into 'shut your mouth"), the Spanish fashion brand's first foray into Singapore. Poh is eagerly awaiting the arrival of more shops at the mall in the months ahead, including that of Bottega Veneta. "It's like a one-stop shopping mall for my family and me," Poh gushes, "The food, service and ambience are superb! "

Poh is likely to find her regular shopping haunt even more crowded this week as ION Orchard kicks off a grand, nine-day launch that includes a performance by Grammy winner Carrie Underwood and a gala fashion show, and culminates with the official opening event on Oct 23 with Singapore's president S R Nathan as guest of honour.

CapitaLand and Sun Hung Kai Properties won the site in December 2005 with a bid of $1.38 billion. In 2007 as the stock market rocketed and the property market roared, selling prices of the penthouses at the upscale 175-unit Orchard Residences, which sits on top of ION Orchard, hit a high of $5,600 psf. Then, financial markets crashed and economic activity collapsed. Retailers began to think twice about opening new stores and analysts feared that ION Orchard would weigh down the balance sheet of CapitaLand.

Those fears appear to have been misplaced. “Although we've gone through this cycle, many of the retailers have been convinced by our positioning, our location and have stuck to their commitment through the volatile period and opened with us," says Soon Su Lin, CEO of Orchard Turn Developments, the joint-venture company that CapitaLand and Sun Hung Kai have equal stakes in. "Now, things are improving again, and the outlook is better." ION Orchard is 99% leased, with 95% of the stores opened. Since its soft opening on July 21, 13 million visitors have passed through its doors, with an average crowd of 150,000 a day on weekdays, and swelling past 200,000 on weekends and public holidays. These figures have surpassed the owners' original projections of 100,000 a day.

It wasn't just the economic recovery that saved ION Orchard. Given its prominent location sitting on top of the Orchard MRT station, the mall has been designated a landmark development by the URA and is a significant piece in the overall makeover of Orchard Road. Moreover, it is run by CapitaLand, which has proven itself to be an adept manager of retail properties both in Singapore and around the region.

Indeed, a good proportion of the shoppers at ION Orchard are likely to have been enticed away from other malls. For instance, Poh's favourite mall used to be Ngee Ann City, located next to ION Orchard. “It also offers a wide variety of shops, but not as many as ION Orchard," she says, adding that she still visits Ngee Ann City but less frequently.

Is ION Orchard attracting shopper traffic at the expense of other malls? Or, is it only benefiting from a temporary rush of curious shoppers? Will shopper traffic grow enough to sustain the new malls opening in the area? What does all this new space mean for retailers and investors in real estate investment trusts like CapitaMall Trust (CMT), Frasers Centrepoint Trust and Starhill Global REIT?

New malls to compete and complement

"You must know that Singaporeans have been deprived of new malls along Orchard Road for the last I5 years, says Lim Beng Chee, CEO of CapitaLand Retail Ltd and concurrently CEO of CapitaMall Trust, Singapore's first retail REIT and the largest in terms of market capitalisation, with an asset size of close to $7 billion The last new mall that opened on Orchard Road was Ngee Ann City, in 1993. Explaining the crowds, Lim says, 'it's part and parcel of the novelty of ION Orchard and, over time, it should stabilise. Other malls have also repositioned themselves, and I think the market is big enough for all of us because we have different offerings."

Starhill Global REIT holds a 74.23% strata title stake in Wisma Atria and a 27.33% strata title stake in Ngee Ann City. Franklin Heng, CEO of YTL Pacific Star REIT management, the manager of Starhill Global RElT, says compared with the same period in 2008, total shopper traffic at Wisma Atria jumped 60% between June 3 (when the basement linkway to the Orchard MRT station was re-opened) and July 21, when ION Orchard opened. So far, total shopper traffic has increased another 20%. "Overall shopper traffic at Wisma Atria is now back to 2006 pre-linkway closure levels of about 500,000 visitors every week, and was even higher than the corresponding period in 2006 during the recent F1 race weekend," says Heng. "Since June 2009, tenants at the basement level have reported increased sales of up to 60%"

With ION Orchard's opening and the recent closure of the Paterson Road pedestrian crossing, which means Wheelock Place is linked directly to ION Orchard at the basement level, as well as to the Wisma Atria and Ngee Ann City block, "shoppers have a very compelling focal point for more convenient and pleasurable city shopping", says Heng. "We are cautiously optimistic that, with the recovery in the Singapore economy and improving tourist arrivals, consumer spending will increase in the coming months."

Wisma Atria had undergone an extensive renovation in 2004 with its "pop-out" façade and tall escalators, bringing shoppers directly to the first Food Republic in Singapore on Level 4. Reconfiguration works were also carried out on Level 2 to improve traffic flow and visibility of internal shop fronts over the last two years, and a new side entrance was recently added for commuter traffic emerging at street level from the Orchard MRT station. Wisma Atria has 123m of prime Orchard Road frontage and has plot ratio that is not fully used.

"To keep the retail experience fresh for shoppers and to remain relevant on Orchard Road, we are exploring options to increase retail gross floor area, upgrade the centre's facade and heighten the visibility of the stores," says Heng.

Even Paragon Shopping Centre, which is owned by Singapore Press Holdings Ltd, spent $45 million on a makeover recently. Opening in November are two new retail offerings, the new Mandarin Gallery next to Ngee Ann City, which was more than 97% leased as at last month, and Lend Lease's 313@Somerset, which is fully leased. Likewise, Christopher Tang, CEO of Frasers Centrepoint Commercial, which owns The Centrepoinl across the street from the recently opened Orchard Central and the upcoming 313@Somerset says: "The confluence of The Centrepoint, Orchard Central and 313@Somerset will help inject more vivacity to this part of Orchard."

Sentiment in the property sector has been helped by the imminent opening of the two integrated resorts (IRs), which are expected to draw more visitors to Singapore. However, Chua Chor Hoon, head of Southeast Asia Research for DTZ, remains cautious about retail spending. "Although investment activity has risen, retail spending remains weak and would depend on the extent of the economic recovery,” she says. "Retail rents are expected to drift along, with minimal declines for the rest of 2009 and in 2010, with more retail space in the pipeline completed." DTZ says prime first-floor rents in Orchard Road/Scotts Road fell only 0.5% to $39.30 psf a month, which is 7% to 14 % below the peak level a year ago. Meanwhile, suburban mall rents have remained unchanged, with first-level rental rates holding up at $33 psf.

For August, the seasonally adjusted retail sales index increased 5.2% m-o-m, but fell by the same amount y-o-y. Interestingly, while department store sales increased 0.6% m-o-m in August, apparel and footwear sales rose 10.9%, watches and jewellery sales were up 4.7%, and restaurant sales rose 3.2%.

"My sense is that after the two IRs open, there will be more traffic coming in," says Lim. When Marina Bay Sands Shoppes, the shopping mall located at the Marina Bay Sands lR is completed, it will have more than 800,000 sq ft of retail space. So far, it is more than 76% pre-leased. Last Thursday, Marina Bay Sands announced that, in addition to established names like Chanel and Tiffany, new brands and labels with standalone stores opening in Singapore for the first time at its shopping mall include French brand Anne Fontaine, Italian apparel brands Henry Cotton's. Paul & Shark, Stefano Ricci, Australian lingerie label Wolford, fashionable Chinese brand Marisfrolg, and chic Hong Kong labels Moiselle and Rabeanco. Marina Bay Sands has already secured leases for more than 80% of the 300 stores, says David Silvester, Las Vegas Sands Corp's vice-president of Retail Asia.
CapitaMalls Asia's top asset

ION Orchard's impact is not limited to the retail property market. Over the last couple of weeks, it has also been the subject of speculation among stock-market investors. That's because it is the largest asset in CapitaMalls Asia, the new retail property unit of CapitaLand that is to be spun off and listed on the Singapore Exchange. CMA will hold CapitaLand's stakes in CMT and CapitaRetail China Trust (CRCT) as well as the management company of both REITs. It will also have an effective interest in 22.9 million sq ft of retail space - worth some $7 billion - in various stages of development, from India to China.

CapitaLand has developed and used its stable of REITs to hold its mature assets, enabling it to recycle its capital into more development projects. CMA is expected to continue this strategy with the group's retail properties, offloading the mature Singapore malls into CMT and the ones located in China into CRCT. In Singapore, the two completed assets that are not yet in CMT's portfolio are ION Orchard and Clarke Quay. ION Orchard was most recently valued at $2.4 billion, making it the single largest asset by value in CMA. If Orchard Residences were included, its value would be $3.8 billion.

Should investors who want long-term exposure to ION Orchard buy shares in CMA after its IPO or CMT?  In February, the latter raised $1.23 billion in a rights issue, which was largely used to pay down its debt and improve its financial flexibility to make acquisitions. However, Lim, CEO-designate of CMA, is unable to say whether CMA's stake in ION Orchard will be injected into CMT. "It's too early," he says. "When we announced the rights issue, we had said that when we do a deal, it has to be a 'win-win'. The official opening of ION Orchard is only going to be on Oct 23."

CMA is unlikely to be in a hurry to offload ION Orchard after it is listed though. Tony Darwell, an analyst at Nomura, says that the listed CMA will be so well capitalised that it will have "potential headroom for $2.6 billion in new acquisitions". And, as long as it is able to keep improving its value, perhaps through asset enhancement exercises, it may make little sense to offload it into CMT, especially if it is able to raise funding on its own on more attractive terms than selling its properties to its REITs. So, are CMT and CRCT at risk of becoming duller investments once CMA hits the market?

Officials at CapitaLand insist that its REITs will remain relevant investment instruments. Both CMT and CRCT will have first right of refusal to the assets of CMA, just as they have done with CapitaLand Retail Ltd, the unit of CapitaLand that develops and manages its retail properly assets, Lim notes. "They are important capital partners to grow our business, and they are a core part of our capital management," he adds.

The geographical-and-return profile of CMT and CRCT are also much more well defined than that of CMA. And, the REITs pay out almost all their cash flow every year, tapping debt and equity markets for each investment they make. "You don't expect to see a developer paying out 100% of its profit, for instance you don't see CapitaLand doing that," says Lim. "But at CMT, we've been doing that since day one."

Lim also points out that investors in REITs can expect some income growth, even in the absence of acquisitions. "In the past seven years since the listing of CMT, the management has re-invested around $100 million every year to improve the performance of the assets and to create a better shopping experience for shoppers as well as enabling our tenants to do better business," he says.

Some property-market watchers also have little doubt that CMT and CRCT will continue to be of interest to investors even if their operating environment changes.

"CapitaLand was the first mover in 2002 with the launch of a retail REIT in Singapore," says Michael Kercheval, president and CEO of the International Council of Shopping Centres, a global association for retail property. "Singapore has always been admired and respected as an emerging market laboratory for new capital-market vehicles – REITs and other structures – to tap public markets."

Still, the conflict of interest between minority investors in CMA and its REITs like CMT and CRCT is likely to be more pronounced than it was with CapitaLand, especially when it involves assets as large and promising as ION Orchard. Not only is the mall large relative to both CMA and CMT, it appeals to be reshaping the retail property sector and enlarging the whole market.

For instance, well-known local aesthetics doctor Georgia Lee hardly visited shopping mails before ION Orchard opened. Yet, despite her busy schedule and preference for a highly personalised shopping experience, she has already made two visits to the new mall, attracted by its line-up of exclusive brands.

"Once at Louis Vuitton and another at Prada – and both were closed-door shopping events," she says. "I do like ION Orchard for its spacious layout as well as its relatively more high-end shopping atmosphere."

The brands she favours currently are DSquared2 and YSL. "However, I always buy my staples of Prada and Chanel, and LV is interesting of late." She might soon be back at ION Orchard to check out its Harry Winston Jewelry store, another brand she likes that has just come to Singapore.

While there may be doubt among investors about to gain long-term exposure to the hottest property on Orchard Road, there seems little doubt that CapitaLand has managed to create yet another prized real estate asset.


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