As the growth of the retail sector corresponds somewhat with growth in demand for commercial retail premises, we would like to take this opportunity to briefly discuss the retail property market outlook and its impact on retailers.
Within the property sector, the development of retail property is a top priority for many investors. Surprisingly, major developments are still taking place in densely populated cities like Jakarta and, to some extent, Depok, Bogor, Tangerang and Bekasi (the Debotabek area within a 50-km radius of Jakarta).
According to Procon Indah, total retail space in this area stood at 3.6 million sqm at the end December 2006, revealing a 17 percent compounded annual growth rate over the past three years.
The supply of retail spaces is expected to further increase by an additional 1.2 million sqm within the next two years. Among other things, two major new shopping malls (Grand Indonesia and Pacific Place) are to come onto the prime retail market in 2007, providing a total of 183,000 sqm of retail space.
We believe that the occupancy rates of retail premises vary from one location to the other. We might find a relatively high occupancy rate in the prime district (within the central business district) as compared to mid-grade shopping malls.
Statistics show that occupancy rates in the prime district are still above 90 percent in spite of the additional space coming onstream, while those in other locations are lower. In our opinion, the appetite for new retail space is starting to subside, particularly for the second-tier shopping malls. New shopping malls in these areas are taking longer to lease space.
However, the influx of smaller players, such as trade center-type retailers and potential new foreign retail operators have prevented any significant drop in the take-up ratio.
In 2006, the average take-up rate for retail space in the Jadebotabek area stood at 76 percent versus 82 percent in 2003. This means that around 920,000 sqm of selling space was added over the past tree years, producing a total of 2.7 sqm at the end of 2006.
Despite the additional selling space, however, rental rates continue to inch up. The calculation of rental rates in Indonesia is rather unique. The rates in prime locations are usually quoted in U.S. dollars, although ever since the 1997 economic crisis, the exchange rates are predetermined and do not reflect the prevailing market levels.
While the average rental rate for prime district malls has only inched up, the predetermined rupiah-U.S. dollar exchange rate has consistently increased.
In contrast, the rents for second-tier malls are quoted in local currency and tend to be more stable than those of the prime district malls. According to Procon Indah, the average rental level (in rupiah terms) has increased by an 8.7 percent compounded annual growth rate over the past three years.
Although the increase in the rental rate might start slowing down in anticipation of the large supply coming onto the market within the next two years, we believe that a fall in the rate is unlikely to happen as competition for prime retail locations remains tight.
Currently, there are only a few major retail operators in Indonesia, and these control approximately 60 percent of the domestic modern retail market. Retail companies such as Mitra Adiperkasa, which targets the upper-end income segment, have occupied almost all the major upmarket shopping malls, like Senayan City and Grand Indonesia, while Ramayana Lestari Sentosa primarily occupies premises in secondary locations.
As competition in the major cities like Jakarta picks up, some retailers attempt to avoid the intense competition in these areas by focusing their store expansion plans on untapped areas with spending power that are ready to accept modern retail outlets.
This geographical diversification should consequently support the additional space in the Debotabek area.
Within the modern retail market, the growing popularity of the hypermarket concept has helped to keep the take-up rate for retail property high.
Despite their late entrance to Indonesia in 1998, the country's hypermarkets have expanded rapidly and now have 190 outlets nationwide, and occupy an estimated 1.5 million sqm of retail space. And they're expansion has not yet come to an end. Matahari Putra Prima alone will add over 80,000 sqm of hypermarket space this year, while Ramayana Lestari Sentosa will shortly open its new hypermarket in Sentra Grosir Cikarang.
Despite the mushrooming of malls and hypermarkets in the hinterland of Jakarta, we believe that rental rates will remain high as competition for prime retail locations remains tight due to an influx of small players, such as trade center-type retailers, and the potential for new foreign retail operators to set up shop here.
On top of its growing popularity, the hypermarket concept has encouraged high take-up rates on the back of major store expansions by hypermarket operators like Hypermart, Carrefour and Giant. Meanwhile, many top-end stores are probably unaffected by the prolonged weakness in spending power among the general population due to the amount of "hot money" in circulation.
Overall, we believe that coming onstream of additional retail space over the next few years and the lack of certainty about growth in consumer spending should encourage retailers to improve their operating efficiency.
Fast merchandise turnover and stringent cost control are likely to be the determining factors for retailers in winning the battle as we believe that Indonesia is on the threshold of a buyers' market.
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