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Monday, February 17, 2014

Location, location, location

The Business Times
Cai Haoxiang

WHEN we buy property, we are told that location is all that matters. But defining a good location is easier said than done. Does it mean buying something in a central and accessible area? Central to what? Accessible to whom?

There are wheels within wheels, and locations within locations.

To understand this, look no further than Orchard Road, and two malls side by side there: Somerset 313, which sits atop Somerset MRT, and Orchard Central beside it.

Theoretically, an Orchard Road property sounds good. Let's say I offer you two commercial buildings, both within walking distance of Somerset MRT, both located along Orchard Road, Singapore's premier shopping belt. Who doesn't want to own either?

Yet Orchard Central sometimes feels like a ghost town. While there are good restaurants in there, it does not see much human traffic. You can blame the layout, the tenant mix, or the way floors are connected to each other. For some reason, people do not visit it, despite its central location.

Somerset 313, in contrast, is bustling. Emerge from the exit from Somerset MRT, and you see crowds of people milling about its first floor as they browse the latest gadgets at EpiCentre or shop for dresses at Forever 21.

But as you go higher up the floors, the crowd, too, diminishes to a trickle. Food Republic on Level Five offers a wide variety of cuisines at affordable prices, but the tables there are not as packed as other food courts.

Investing in property is more complicated than you might think. Like stocks, everything looks rosy in a bull market, when people snap up every unit in a launch and sell it to people who sell it to people. But just wait till the tide goes out, to paraphrase Warren Buffett, and you'll see who's swimming naked.

In a thin market where buyer interest is scarce and there is plenty of supply, closing a sale will be tough. Suddenly, the fourth-floor unit with a blocked view and an inauspicious doorplate will go for much less. The shoebox unit in a remote part of Punggol or Sengkang with 40 years left on its lease? Good luck with that, too. A three-bedroom unit within one km of an elite primary school and a national hospital will probably do just fine, though.

One good thing about real estate investment trusts (Reits), especially shopping mall Reits, is that investment research is much easier to do.

You can visit the actual location to size the place up for yourself - whether there are good connections to the MRT, whether there are better malls nearby that people flock to, whether the mall is ageing and uninviting to hang out at.

You can talk to store owners to find out whether they are happy with mall management and making money. You can ask your friends and family who frequent the malls whether they will come back. You can see, at one glance, whether the mall is likely to make money - or whether it is going to face competition.

Bedok Point opened in 2011 and was acquired by Fraser Centrepoint Trust (FCT). At that time, it was already known that CapitaLand was building the now-opened Bedok Mall right beside it. Analysts doubted whether FCT made a wise purchase.

True enough, in its latest financial results after the Bedok Mall opening, occupancy at Bedok Point slipped to 80.2 per cent from 96.7 per cent in the previous quarter, and rental contracts were renewed at a rate that was 16 per cent lower - a less than ideal situation known as "negative rental reversion". Occupancy is expected to go back to 90 per cent when Harvey Norman moves in, but there's no getting around the fact that the mall is not doing that well.

Seeing crowds of people at malls does not automatically mean the shops there will make money either. At any one time, high-end shops seem disconcertingly empty - you need only walk around the upper floors of ION Orchard or visit the high-fashion labels at Paragon.

But some might only need to close a few sales a day to cover their rent and make a decent margin, while a mass-market retailer has to depend on volume and discounts to get by. In a mall, shops on lower floors tend to get more shopper traffic. Hence you see mass-market fast food choices there such as BreadTalk and McDonald's.

Those located on higher floors will tend to draw crowds if their offerings are really, really desired, and if people go there for a specific purpose, such as to see a movie at a cinema or to send their children to a tuition centre.

A property with a good location is, generally speaking, easily accessible. But a place that is easily accessible might not have a good location. A nearby MRT station matters a lot where a mass-market residential or retail property is concerned. But it is just a start.

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