Being a shopping-mall landlord is a risky business in the age of e-commerce, even in retail-crazy Singapore. So it’s only sensible that CapitaLand Mall Trust is merging with CapitaLand Commercial Trust, which owns offices.

The S$8.3 billion ($6.2 billion) deal between the two sister real estate investment trusts, or REITs, will create a property owner of some heft. The combined entity will have the firepower to undertake up to S$4.6 billion in overseas acquisitions. At home, the revenue stream from shops — under pressure from online sales — will get commingled with more stable office rents.

That will be a relief. CapitaLand Mall Trust’s income available for distribution grew a healthy 7.5% last year, but the REIT’s tenants saw sales decline 1.4% on a per-square-foot basis, with electrical and electronics, home furnishings and information technology and telecommunications recording falls of more than 10%, according to figures released Wednesday.

This is part of a global trend. As I wrote in July, Singapore’s Generation Z — those born after 2000 — won’t be mall rats. It will be a challenge for landlords to eke out positive rental “reversions” when tenancies come up for renewal. More than half of Rafffles City Singapore, a marquee property in the trust’s portfolio, was leased out again last year, and the  owner saw no increase in rates. At The Atrium@Orchard — another prestigious downtown location — rentals dropped 6.5% from when CapitaLand Mall signed them three years earlier.

Mind you, Singapore’s office market is also showing signs of fatigue. Rents for Grade A offices stopped rising in the December quarter as the city’s small, open economy slowed amid U.S.-China trade tensions. Colliers International Group Inc. forecasts they will climb just 1% in 2020, before sliding 4% next year. Things could get uglier still if the co-working trend comes under strain following last year’s  WeWork debacle.

Even those worried about the shared-space segment should be encouraged by the technology industry — especially fintech. With 21 bids for up to five new digital bank licenses, the outlook for the city’s office market is more optimistic than it is for retail. CapitaLand Commercial Trust generally experienced positive rental reversions during the December quarter. Properties such as Six Battery Road, formerly Standard Chartered Plc’s Singapore headquarters, and 21 Collyer Quay, where WeWork will move in after HSBC Holdings Plc moves out, could do even better after the landlord spruces them up this year.

Singapore’s office market will also undergo transformation as city planners make a deliberate attempt to have more people living in and around the central business district. The idea is to increase the utility of the island’s priciest real estate so that it’s not a ghost town after working hours. As part of the plan, old office towers near the central bank and the stock exchange will be redeveloped as mixed-use properties that have more space to sell or rent out. 

Neither these structural changes nor the cyclical ebb and flow of office demand and supply is a surprise to property builders and owners. Assessing the retail industry is trickier. Not only could it be facing terminal decline because of surging digital consumption, it’s also driven by tourism. Interest in the city peaked after the 2018 release of “Crazy Rich Asians,” and continued to rise — to about 5 million visitors in the third quarter of 2019 — after Hong Kong’s anti-government protests. The recent outbreak of a new respiratory virus, however, is a reminder of how ephemeral such gains could be.

The virus, which originated in the central Chinese city of Wuhan, may or may not be a repeat of the deadly 2003 SARS epidemic, which hit Singapore hard. Yet it gives real-estate investors another reason to want their rents coming from a combined pool of retail and offices. That way, the profit available for distribution will become more future-proof — at least until artificial intelligence makes it unnecessary for humans to show up for work at all.

To contact the author of this story: Andy Mukherjee at amukherjee@bloomberg.net

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

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