As purchasing power slows in mature markets such as the US and the eurozone, international luxury and high-street brands are seeking opportunities for expansion in dynamic, rapidly growing Asian markets. Bangkok is fast becoming the destination of choice for a number of these brands and for international tourists from large, high-spending source markets alike.
Growing domestic demand and rising tourist numbers have resulted in strong leasing demand for prime grade retail space in Bangkok, from both existing retailers wishing to expand and from newcomers. Many high-profile international brands, including Giorgio Armani, Valentino, MiuMiu, Sephora and Victoria's Secret have entered the Bangkok market recently or plan to do so by year-end.
More international retail brands entering the market are attracted not only by high exposure to both domestic and foreign consumers, but also relatively low rents compared with more established retail markets in the region.
Rents for prime retail space in Bangkok as of the second quarter of 2013 averaged roughly 2,274 baht per square metre per month, far lower than the equivalent of 10,201 baht per square metre per month offered in Singapore and 13,391 baht in Hong Kong.
At the same time, international tourist arrivals and per capita expenditures are reaching new heights. International tourist arrivals to Thailand for the first eight months of 2013 reached 17.4 million, up 21.4% year-on-year. Visitors from East Asia account for both the largest (60.3%) and fastest growing (31.7% year-on-year) segments. The average daily expenditure by international arrivals is gradually increasing (4,393 baht per day per person in 2012 versus 4,187 baht in 2011), and about a quarter of tourists' spending is dedicated to shopping alone.
Despite these opportunities, the market is not without challenges, among which are market conditions and existing taxation regimes.
Currently, the Bangkok retail market has a total supply of 8.9 million sq m of space. Of this, 4.6 million sq m are defined as prime retail space.
Less than 6% of this prime space remains vacant, so some existing and new brands may face difficulties acquiring well-located space in prime retail centres.
While new prime retail space of 136,300 sq m is in the pipeline and scheduled to be completed by the end of the year, demand from most retail brands is concentrated in two new high-profile projects: Central Embassy and Emquartier. Both projects are being developed by Thailand's leading retail developers, Central Group and The Mall Group and are expected to come online by next year.
Space in future prime-grade projects has already witnessed healthy pre-commitment levels. Central Embassy, with 70,000 sq m of gross floor area, has achieved a pre-commitment rate of 90% and will include Chanel, Gucci, Prada, Hermes, MiuMiu, Saint Laurent, Mulberry, Balenciaga, Ralph Lauren, Vivienne Westwood, Giuseppe Zanotti, Roberto Cavalli and Paul Smith stores. Emquartier, another prime project with 200,000 sq m of gross floor area, which is scheduled for completion next year, has reported a pre-commitment rate of 100%, although a tenant list has not yet been disclosed.
With strong pre-commitment levels, the average vacancy rate in the Bangkok prime retail market is likely to remain stable despite new supply.
The current taxation structure in Thailand is another factor that makes retail operations challenging, making for a tough sell to domestic consumers, let alone international visitors. For example, it is common for Thai consumers to seek out luxury goods locally from grey-market retailers or to make purchases while abroad.
In an effort to stimulate both lagging domestic consumption and burgeoning tourism expenditure in the retail sector, the Thai government has been considering a proposal that would reduce taxes on luxury goods in order to better compete with regional luxury retail destinations such as Hong Kong and Singapore.
The proposed tax reductions initially would cover imported luxury goods such as cosmetics, perfumes and watches, which are typically subject to tax rates in excess of 30%. While the specific scope or scale of the tax reductions has not yet been fully revealed, news reports suggest that they could be in place by year-end.
The efficacy of this initiative is in question, with some experts expressing doubts over whether or not such tax reductions will increase arrivals and expenditure to an extent that outweighs the possible negative impacts on domestic brand competitors. Despite those challenges, the positive outlook for the retail business should remain throughout this year and next.
More international brands are expected to enter the Bangkok market while existing brands will continue to expand their presence to take advantage of the growing purchasing power of both domestic and foreign consumers. In line with strong leasing demand, vacancy rates of retail space are expected to remain stable across the capital, particularly in prime retail centres. Rents will continue to rise gradually but will remain competitive, compared with other major retail markets in the region.
Anusorn Rotkanok is an analyst at Jones Lang LaSalle, specialising in retail and investment market research. For more insights, readers can visit www.joneslanglasalle.co.th or call 02-624-6400.