s year. And nowhere is the engine of growth sounding louder than at CapitaLand. CapitaLand (in long form:CapitaLand Integrated Commercial Trust, CICT) is Singapore’s largest real estate investment trust (REIT),listed on the Singapore Exchange and a key player in the island state’s market. It operates retailproperties, mixed-use projects and office buildings. Although it operates primarily in Singapore, it alsohas a few projects in Germany and Australia, including Sydney’s Greenwood Plaza. It has 26 properties inall. Results in for CapitaLand’s first quarter, together with indicators of improving macro trends since then,paint a picture of increasingly robust pedestrian traffic and sales, and wherefore they go then rentalgrowth eventually follows, albeit with a lag. 2023: the year of normalisation Retail sales per square foot (or per square metre according to your taste) for CapitaLand’s mallsincreased 10.2 per cent year over year in the first quarter. Downtown malls outperformed their suburbancounterparts, with sales increasing by 20.3 per cent versus 4.1 per cent in the suburbs. Yet shopper traffic is up by much the same amount in both downtown and suburban malls (29.9 per cent and 24.0 per cent respectively), indicating that spending per customer has been holding up at the downtown malls but falling quite materially at the suburban properties. What gives? Clearly, the increase in tourist arrivals and the steady return of workers to offices are helping thedowntown malls disproportionately, while suburban Singaporean working families outside the urbancore would be harder pressed financially because of persistent inflation, which in March was still upthere at a pesky 5.5 per cent year-on-year. On the surface of it, this is a concern for mall operators, but on the other hand it does represent an opportunity for upside with adjustments to the tenant mix, and to themerchandising and pricing strategies of the retail tenants themselves. For its part, CapitaLand has been busy with the tenant mix adding space particularly in sporting goods,fashion, health and beauty, and food and beverage. The vast majority of these additions have been fornew-to-market or new-to-CapitaLand tenants, so the company is leveraging the strength of its realestate platform to attract new and novel retailers. First quarter average leasing spreads (the gap between incoming and outgoing rents) was (from thelandlord’s perspective) an encouraging 6 per cent, with downtown malls particularly strong (+7.2 per cent). Since leases only turn over on a rolling basis, average rents will increase at a much more modest rate than the current spread. The increase in retail property rental revenue (1.5 per cent) relative to sales productivity growth (10.2 per cent) in the first quarter is therefore to be expected. Another factor to bear in mind that weighs on the flexibility of rents is that most retail leases in Singapore (and in Asia more broadly) are still gross rent deals with no sliding variable component that adjusts for sales growth or decline. There is a trade-off at work here: a gross rent deal offers predictability for landlord and retailer alike, but it prevents the landlord from sharing quickly in a sales boom and gives the retailer no protection in the reverse situation when sales head south. Leisure and entertainment have the strongest growth Categories leading the recovery at CapitaLand’s malls are leisure and entertainment, shoes and bags,sporting goods, food and beverage, fashion, department stores, IT and telecommunications, andeducation, all of which have enjoyed double-digit percentage year-over-year growth of sales per squaremetre. The outlook for CapitaLand’s take Company revenue across its entire portfolio of all property types in the first quarter (primarily fromtenant rental payments), was S$388.5 million, up 14.4 per cent from a year ago. Net property income (NPI) was S$276.3 million, an increase of 11.3 per cent. CapitaLand’s retail occupancy was slightly up from a year ago: 98.5 per cent compared with 98.3 per cent. These are great numbers, and should presage a strong rent recovery over time. Further support for rental growth is the excellent outlook for the pace of new retail project openings.CBRE Singapore expects new space over the next few years to come down from more than 100,000square metres annually from 2017-19 to less than 40,000 metres per year. The Singapore backdrop The percentage of Singapore retail sales attributable to e-commerce remains close to 15 per cent, as it was throughout last year. With customers swarming back to malls, sales growth for CapitaLand is comparing well with that for the island state’s retail as a whole. March sales growth, excluding motor vehicles, for Singapore was a shade over four percent on a year-over-year basis in March after an 11.6 per cent jump in February. Three categories in particular — department stores, apparel, and food and alcohol specialty — have been starring in Singapore’s retail recovery. All three are well represented in CapitaLand’s and its competitors’ malls. It has become a dull cliché that retailers and shopping centre operators face a lot of uncertainties (ofcourse they always do), or, to use an even duller cliché, face ‘strong headwinds’ (they always do). Whatwe can say with some confidence is that inflation will remain at an uncomfortably high level for theremainder of the year even if it declines further, and that economic growth will be modest, particularlyif much of the West falls into recession as some believe. But if current trends persist, and since we seem to love our yachting metaphors, the dark clouds willdisappear and retailers at CapitaLand’s malls will go into the second half with a wet sail.