Thursday, February 2, 2012

Killer Rent News Finally in Business Times

I've been railing about the absurb high rental component in stuff & services we buy in S'pore ever since starting this blog. Be wise with $$. Be frugal. Isn't it foolish paying high rent for product/service if you can avoid it?

Reit manager said the rent rise is a component of market forces. What bullshit is that when the govt own most of the land & manipulate the supply & demand of it? There is no market forces. The govt is the market, it set the market. Also how private are the 'entities' mentioned when the majority shareholder is the govt itself?

I'm smelling a bloodbath soon. When more & more business go out of business, people can't pay their already absurb mortgages on their grossly inflated pigeon hole dwellings. What does that mean? It means a subprime crisis created by our Pay & Pay govt. is coming.

Most glaring example i have pointed out is the Starbucks outlet sweating over killer rent at the mall near where i live. Just gives me the creeps when is a booth space instead of shop space.

SMEs blame Reits for growing rental pains

JTC asked to review its current policy of divesting industrial space to private entities

Rising rentals for commercial & industrial space have emerged as a pressing issue for small & medium enterprises (SMEs), and the fingers are pointed squarely at the dominance of real estate investment trusts or Reits as landlords.

Reits' drive to enhance yields & returns for unit holders - which usually translates into rental hikes - have left many SME owners, who feel they have limited alternatives here, fuming.

It has also led to calls - including a recommendation by the newly formed SME Committee - for JTC Corp to review its current policy of divesting industrial space to private entities like Reits and return to its previous role of an industrial landlord, so that it can provide ready & affordable industrial space to SMEs.

'Rentals & capital values of properties are going up, impacting business costs for SME owners & eating into their bottomline,' said Lawrence Leow, chairman of the SME Committee.

According to Abdul Rohim Sarip, president of the Singapore Malay Chamber of Commerce & Industry (SMCCI), rental forms between 40% & 50% of operational costs for small businesses. So the increase in rental costs has had a significant impact on their bottom-line.

'About 40% of these companies (from the retail and manufacturing industries) who seek advisory assistance from EDC@SMCCI have difficulty in sustaining their operational costs & are in need of short-term loans from banks, which is another challenge,' he added.

Noted Low Cheong Kee, managing-director of Home-Fix DIY: 'Reits are commercial entities. They will do what they can to keep upping the rent at every renewal whereas JTC had a national agenda to stabilise rent.'

JTC, a statutory board, oversees the development of industrial infrastructure in Singapore. There is clearly frustration among SME owners. An SME owner who did not wish to be named told BT she is currently in negotiations with her landlord, a Reit trust manager, to renew her lease for an additional 3 years. The new lease agreement is for $28,000 per month, plus 3% of the store's monthly gross turnover (GTO). She currently pays $17,000 for her 1,000 sq ft unit.

Another SME owner said his rent for a 50,000 sq ft business space in Tuas increased by 56% from $50,000 to $78,000 when he tried to negotiate to renew his lease for 8 months.

According to official statistics, rental rates of multiple-user factory space increased 16.2% year on year in 2011, while rental at multiple user warehouse rose 13.3%.

Retail rents also rose on Singapore's success as a world-class shopping & event destination, but are expected to stabilise in 2012 due to a more muted economic outlook and oncoming supply. Average rents at prime Orchard Road malls went up 4.6% year on year last quarter, while those at prime suburban malls edged up 2.2%, according to CBRE Research.

What rankles too is the perception SMEs have that the odds are stacked in favour of the landlords.

Retailers argue that the practice of requiring tenants to reveal their GTO figures gives landlords an unfair advantage when negotiating rents. Said an SME owner: 'The current retail market is unbalanced in favour of landlords . . . (since) in the prime retail spaces, you will find that 80% to 90% of landlords insist that their tenants reveal their monthly sales numbers.'

There is also the problem of landlords working in a clause that allows them to terminate tenancy agreements. 'So even though the lease may be signed for 2 to 3 years, and there's no breach of contract, landlords still have the right to terminate the tenancy of the tenant simply because the landlord feels that another tenant might be able to bring in a better image, sales, or rental . . . So your future is never secure,' he said.

Greenpac's chief executive Susan Chong not only had the plus-2-years clause of her lease terminated following the sale of her factory building to a Reit, but is also unable to negotiate a renewal on her existing lease with the new owner. According to Ms Chong, she has been trying to arrange for a lease renewal since October last year. Her lease expires in April.

Her frustration is palpable, given that she only requires the space for an additional 8 months. 'I'm currently building my own factory so I'm asking that they either allow me to rent for an additional 8 months, or a year,' she said. While she will only require the facilities for the next 8 months, she is willing to renew the lease for a whole year, she emphasised. But thus far, the landlord's response to requests to negotiate has been a firm no, citing potential tenants who are looking to lease the property for a minimum 3 year term.

Reit managers are quick to point out that rents are a function of market forces, and that they are simply looking to achieve market rates. They say tenants have a choice as to where to locate their business & it would be impossible for Reits to charge rental rates above what the market can bear & what other landlords are charging.

'Industrial Reits collectively own about 15.8% (about 6 million sqm) of the total stock of about 38.2 million sqm of industrial property stock as at 2011. Are they able to dictate rental rates?' asked an Ascendas Funds Management spokesperson rhetorically.

'Recent media headlines of high percentage increase in rental rate in certain segments of the industrial property market is a result of catching-up to market rent level as a result of the change from public to private ownership,' the spokesperson added.

According to a CapitaMall Trust Management Ltd spokesperson, rental reversions for malls in CMT's portfolio averaged 2.1% a year in the last 2 years.

'In that same period, our tenants' sales have increased even faster - by more than 6% a year - showing that our tenants continue to do well in our malls,' it added, crediting its strong track record in asset enhancement, which has helped increase shopper traffic & thus tenants' sales.

Still, business owners look back to the time when JTC was a benevolent landlord. Allen Ang, group managing director of Aldon Technologies Services, pointed out that JTC initiated a rent reduction of 15% during the 2009 financial crisis.

Rent now makes up about 11% of the group's overhead costs. 'This is a substantial sum in an operation like ours. Considering our operations/business & industry norms, ideally the rents should stay at around 7% to 8%,' Mr Ang said.

He has signed a third lease for a 3 year term, from 2010 to 2013. The monthly rent for year one is $40,295, while monthly rent for year 2 is $43,498, a year-on-year increase of 8%.

The SME Committee's recommendation for JTC to review its role is an attempt to address these issues. A second recommendation calls for a one-off grant to help relocate SMEs with low value-added activities to lower-cost countries.

The recommendations, among others, will be presented to the Ministry of Finance and the Ministry of Trade and Industry ahead of Budget 2012.


  1. Hi XianLong, Came across your blog recently and find your comments and views interesting. Like you I am a very frugal person, trying to keep live simple and frugal. But being frugal does not increase your incomes merely trying to stretch it. I have been trying hard to increase incomes after saving all these years to grow it in buying asserts ie. mainly stocks. Have been looking at Reits recently and see that you seem quite oppose to such asserts. Are you able to share some insights or your views of asserts buying? Not sure if you have come across a Blogger ASSI(by AK71) he has been very successful in his portfolio of mainly Reits. Looking forward to your views, thanks. Keep writing.

  2. Hi, Thanks for your comment. Yes frugality is more of stretching our incomes. It is defensive. Offensive is as you said- buying assets.

    Your question about reits is something i thought i'll write about in a blogpost. For laymen like us stocks are much more assessible compared to property. We ought to utilise that investment vehicle since there's no capital gains tax here.

  3. Thanks, XianLong appreciate your write up on the concerns of Reits.