Have rising commercial rents reached a tipping point? | Deep Dive podcast

Key Concepts

• Free Market Economy: Singapore's economic principle where prices are determined by supply and demand without government intervention.
• REITs (Real Estate Investment Trusts): Corporate institutions owning retail malls with strategies to execute retail concepts and achieve rental targets for shareholders.
• Occupancy Cost Ratio: A metric tracked by corporate landlords, representing the proportion of revenue spent on rent; different trade categories have different thresholds.
• Oligopolistic Market: A market structure with few dominant suppliers (landlords) and high demand, leading to potential price increases.
• Price Quality Model: A government allocation model for public commercial spaces that considers concept quality, community impact, and sustainability, not just the highest price.
• Turnover Rent: A rental model where rent is a percentage of the tenant's revenue, aligning landlord and tenant incentives.
• Code of Conduct: Rules introduced to ensure fairness and transparency in rent negotiations between landlords and tenants.

Commercial Rents in Singapore: Market Forces vs. Regulation

Setting Commercial Rents in Singapore

• Singapore operates under a free market economy, meaning commercial rents are primarily determined by supply and demand. The government generally avoids intervening in price setting, allowing landlords and tenants to negotiate freely.
• Willing Buyer, Willing Seller: The principle that transactions occur when both parties agree on the price.
• Demand and Supply: If a landlord prices themselves out of the market, consumers can choose alternatives.

Reasons for Rent Increases

• Location: Proximity to amenities like MRT stations can justify higher rents.
• Retail Strategy: Large corporate landlords (REITs, private funds) develop retail concepts for their malls, aiming to control the consumer experience and achieve specific rental targets to satisfy shareholders.
• Occupancy Cost Ratio: Landlords consider the occupancy cost ratio for different trade categories when setting rents. Supermarkets, as anchor tenants, may pay different rates than smaller shops.
• Property Prices: Commercial rentals are linked to general property prices, so if a new landlord buys a property at a higher price, they may increase rents to cover their costs.

The Debate: Free Market vs. Regulation

• Arguments for Regulation (Terence):
  • The market is trending towards an oligopolistic situation with insufficient supply and high demand, giving landlords excessive power.
  • Vacant units should be penalized to prevent price manipulation, similar to regulations for residential property developers.
  • Advocates for more control and social objectives towards some segments of the economy.
  • Cites the example of HDB flats, where government intervention ensures affordability.
• Arguments Against Regulation (Ethan):
  • Artificially propping up prices could damage Singapore's reputation as a free economy, reducing foreign direct investment.
  • It could lead to less spending on upkeeping commercial buildings due to reduced profitability.
  • Residential and commercial spaces are different; residential impacts basic needs, while commercial is business enterprise.

Supporting Local and Unique Businesses

• Large corporate landlords often incorporate a mix of popular and independent concepts to create a more interesting consumer experience.
• They may offer lower rents to attract unique businesses, such as craft shops or heritage-focused retailers.
• However, REITs are bound by commercial and profit expectations, limiting their flexibility.

The Landlord's Perspective

• Landlords are profit-minded and will naturally seek the highest possible rent.
• There is nothing inherently wrong with landlords maximizing profits.
• The issue is the imbalance of power in a market with low supply and high demand.

Transparency and Data

• Lack of Data: There is no readily available data on commercial rental rates, making it difficult to assess fair pricing.
• Advocacy for Transparency (Terence): Advocates for data transparency similar to the residential market, where transaction prices are publicly available.
• Potential Benefits: Transparency could create a more vibrant and efficient market, even though landlords might initially resist it.

International Models

• Sweden: Pegs rental increases to inflation as measured by the Consumer Price Index (CPI).
• Turnover Rent: Pegging rent to the revenue of the business itself.

Turnover Rent Model

• Concept: Rent is a percentage of the tenant's revenue, aligning landlord and tenant incentives.
• Benefits: Landlords share the burden during tough times (e.g., COVID-19) and benefit when businesses thrive.
• Challenges: REITs may find it difficult to project earnings with fluctuating rents.

Government Intervention and Support

• Indirect Intervention: The government doesn't directly set rents but creates schemes to support local businesses.
• HTB Schemes: HTB offers discounts to young businesses (Enhanced Entrepreneur Scheme) and social enterprises (Social Enterprise Policy).
• Price Quality Model: The government uses a price quality model for allocating public commercial spaces, considering factors beyond just the highest price.
• Newer Baru Example: The Newer Baru project, allocated using the price quality model, aims to nurture vibrant communities and social values.

Conclusion

• The commercial rental market in Singapore is complex, with a tension between free market principles and the need to support local businesses and maintain vibrancy.
• Transparency, addressing supply issues, and considering alternative rental models like turnover rent are potential solutions.
• The government plays a role in creating an ecosystem that supports diverse businesses through targeted schemes and innovative allocation models.
• While Singapore prides itself on being a free market economy, some level of intervention may be necessary to nudge the market in the right direction and prevent excessive imbalances of power.