JTC clamps down on industrial subletting

[SINGAPORE] Industrialists who build their properties on JTC land and become the major occupiers of that space will soon have to take up at least 70 per cent of the total gross floor area (GFA), up from 50 per cent currently.

This means they can lease out only 30 per cent of the space instead of half of it.

Another change is that tenants who rent industrial space direct from JTC will be barred from subletting any of that space.

JTC's revised subletting policy kicks in on Oct 1, but it will give a three-year grace period - till end-2017 - to give existing tenants and lessees time to adjust.

JTC said that it has set a limit on the maximum amount of space tenants can sublet because the space was allocated to them "for their own productive use"; they thus have to "continue to occupy the majority of the space".

The industrial landlord said on its website: "Upon extensive consultation with industrialists and industry associations, there is general agreement that 30 per cent of the total GFA is an adequate steady-state space for a company to use as buffer to cater to fluctuating business volumes."

JTC's tenants who lease flatted factory space direct from it are currently able to sublet their space to non-related companies. JTC said that it is revoking this permission because "the intent is for tenants to remain as the main users of their space". "If tenants no longer require some of the space, they can renew their tenancy for a lower quantum at the end of their current term."

JTC's latest move is aimed at promoting responsible, productive use of scarce industrial land here, as well as encouraging industrialists to buy only the size of land and lease the amount of space they need.

R'ST Research director Ong Kah Seng said: "The main purpose is to discourage industrialists (the master lessee) from over-committing to large chunks of industrial space and then subletting it when they realise they have leased way in excess of their space requirements. This may deprive others who need larger industrial space."

Some industrialists lease larger spaces than they need specifically to enjoy lower per-square-foot prices. By carving out and subletting their unused space at market rates, they stand to profit from this, he added.

In its statement to BT, JTC noted that the current subletting policy had resulted in cases of "mini-landlords", whose businesses focused on subletting as a major income source.

SLP International executive director Nicholas Mak said that the policy shift may push out some sub-tenants of the current "50 per cent buffer space", into new spaces, such as strata unit factories. It may also affect end users' decisions to sell and lease back their industrial properties to real estate investment trusts (Reits).

With the proportion of their sub-tenants shrinking from 50 per cent to 30 per cent, these end-user lessees would have to fork out rental for the remaining 20 per cent of the space when paying rent to a Reit landlord.

Mr Mak said: "They have to find a way to fill up 70 per cent of the space themselves, and consider how to generate the additional rental income."

JTC said that end users and third-party facility providers such as Reits and developers can continue to sublet up to 50 per cent of their total GFA to non-anchor sub-tenants within five years of obtaining their temporary occupancy permits; the 30 per cent restriction will kick in only after that.

From the onset, therefore, third-party space providers will have to understand how much space their anchor tenant requires and ensure that the tenant has a five-year expansion plan to raise production in the newly developed facility, Mr Mak said.

Additionally, JTC requires anchor tenants to meet two key criteria: One is that they must occupy at least 1,500 sq m; the other is that they have to meet JTC's requirements in value-added-per-sq-m of space occupied, remuneration per worker and skilled-worker profile.

Mr Mak said that this rule is clearly aimed at encouraging higher-quality use of industrial space and at ensuring anchor tenants are companies that are moving up the value chain - exactly the kind of business activity Singapore hopes to retain.

Implicitly, it may also nudge out less-productive industries.