Are Reits friends or foes of space users?

SINGAPORE’S real estate investment trust (Reit) sector turned 21 in July. With the sector now “coming of age”, it’s clear how capital markets and property groups have benefited from the growth of Reits. 

A property group can inject assets that it owns into a Reit, which is managed by an entity belonging to the group. By setting up a Reit, a property group can create a more capital-efficient business, improve return on equity and build a fund management platform.

Through owning units in Reits, investors can get recurrent income and capital gains from property portfolios in different segments, as well as geographies.

Many listed trusts are active in raising equity and debt. Bankers and various professionals earn fees from servicing Reits in capital raising, acquisitions and divestment. 

However, has the growth of Reits helped space users? The development of the Reit sector may contribute to driving up rents, which directly affect tenants in properties held by Reits.

Driving rents

Managers of listed Reits work assiduously to grow distributable income and net asset value. To do so, they drive organic growth of underlying property portfolios in part by raising rents.

They work to achieve positive rental reversions on renewals, or bring in new tenants who can pay higher rent when existing leases mature. Also, they secure leasing terms that best protect the landlord’s interests.

For H1, CapitaLand Integrated Commercial Trust (CICT) posted rental reversion for its Singapore malls and office buildings of 6.9 per cent and 9.6 per cent respectively. CapitaLand Ascendas Reit saw a rise in renewal rates of leases for its Singapore multi-tenant buildings of 19.5 per cent in Q2.  

While unitholders cheer trusts reporting rental growth, space users may feel aggrieved over higher rental bills. 

Today, many businesses are struggling amid slowing global economic growth, persistently high inflation and rising financing costs. Higher rental costs add to these woes. 

Singapore’s industrial rents and prices climbed for the 11th consecutive quarter in Q2. Rental and price indices rose year on year by 9.4 per cent and 6.9 per cent respectively, according to JTC Corp.  

Could businesses such as small retailers, manufacturers, professional service firms and logistics players, as well as the general inflation situation here, receive help from landlords – including Reits – taking the foot off the pedal when signing new leases?

It would seem so. But Reit managers have to answer to investors. Reits are arguably among the more hard-nosed landlords in town, and it’s not easy to find a win-win situation between landlords and tenants in lease negotiations. 

Space users have choice and can try avoiding Reit-owned properties. Still, listed trusts own substantial real estate here, including many high-quality malls, office buildings, business parks, hotels, warehouses and industrial properties.

More chunky malls became Reit-owned, with Link Reit’s purchase of Jurong Point and Swing By @ Thomson Plaza. A retailer looking to open multiple outlets in major malls may find it tough avoiding being at Reit-owned malls.

Being partners

Nonetheless, while landlords and space users often have conflicting objectives in lease negotiations, both parties can sometimes be partners, particularly in the retail property segment.

Many retail leases include a component of turnover rent. By having a tenant pay a percentage of turnover, the landlord is vested in seeking to boost the tenant’s sales. 

In 2022, overall average retail portfolio gross turnover rent was 7.6 per cent of retail gross rental income for CICT’s Singapore malls.

Outside of Reits, Changi Airport Group’s variable rent, computed based on percentage of sales, recognised within its airport concessions and rental income, amounted to S$75.7 million for financial year ended Mar 31, up from S$18.8 million a year earlier.

Many mall owners such as Reits invest in activities that benefit tenants. A landlord might spend on branding and marketing to attract shoppers. It may hold promotional activities such as carnivals for children, festive fairs and celebrity appearances to drive footfall.

Strong mall owners help their tenants and properties succeed by actively curating the tenant mix to ensure a mall serves the needs of its target catchment market, and avoid cannibalisation within specific trade categories.

Some mall owners have rewards programmes to encourage spending at their properties, or online platforms to help their tenants better engage with shoppers and drive sales.

In contrast, owners of office buildings or industrial properties may have limited scope to boost their tenants’ revenue. Still, a manager of an office or industrial Reit can argue they help improve the productivity of their tenants by providing well conceived, managed and maintained spaces. 

Business sustainability

Many Reits tout their environmental and community engagement initiatives. Still, what matters greatly to investors is business sustainability.

To create a sustainable business, Reit managers often need to aggressively drive portfolio rental growth. Delivering consistently strong operating performance produces a virtuous circle, as a Reit may then trade better and be better placed to grow via acquisitions.

As high interest rates weigh on the operating as well as unit price performance of Reits and make acquisitions tougher for the trusts, Reit managers face huge pressure to deliver organic growth by squeezing rental growth from tenants. 

Of course, responsible Reit managers will not push tenants too hard because failing tenants create problems with potential arrears or early lease terminations.

Given their focus on driving financial performance, some Reits may avoid leasing space to startups or small enterprises, which cannot afford high rents or have weak credit standing. Could Reits then harm the growth of an entrepreneurial culture? 

Singapore’s policy framework has contributed to the success of Reits. Guidelines applicable to Reits help ensure high levels of disclosure and transparency. Reits enjoy favourable tax treatment, where many investors receive tax-free distribution income. 

If there is a dark side to the development of Reits, the government is probably best placed to manage any adverse effects.

For example, government incentives can help Singapore remain competitive in areas such as manufacturing and research. The government can also help ensure that the growth of startups and small businesses is not held back by unaffordable rents.

Reits and space users are in a relationship that involves being both partners and opponents, somewhat similar to the relationship between banks and their customers. 

Generally, the deal for space users with Reit landlords is: pay up, for high-quality space. Hopefully, the high-quality space can in turn contribute to enhancing the business performance of space users.