Economists divided over Reit impact on business

[SINGAPORE] Calls in Parliament for the government to rein in industrial and commercial rents or reverse JTC's land divestment programme to "buy back some of the Reits" have sparked mixed responses from market watchers, with some in agreement and others cautioning against tinkering with free market principles.

A decade ago, JTC divested most of its industrial property, saying at the time that the move would create a more open and vibrant market by giving the private sector more freedom to operate flexibly to accommodate industry needs.

On Tuesday, however, Member of Parliament Inderjit Singh (Ang Mo Kio) called the divestment "a mistaken policy" during the Budget debate. "The government lost the ability to influence rental prices resulting in developers and investors (including Reits) making the money - this is passive income and not productive income benefiting the investors," he said.

It's a debate that has been cropping up in recent years as businesses reel from rising costs. Some economists agree that Singapore has over-embraced its free market approach and needs to recalibrate, especially with the proliferation of real estate investment trusts (Reits).

Irvin Seah of DBS, for instance, feels that Singapore has overdone what it set out to achieve and should backpedal. He believes that a sizeable amount of commercial and industrial property should come under government control to serve as a benchmark for the market.

"Right now, what we have is an oligolopolistic structure, with a small group of players in this market, which makes it prone to price rigging," he said.

"It is not so much about bringing prices down, but about ensuring that we have a lever on certain scarce resources (such as land). The Reit model may work in big countries with ample land but less so for land-scarce Singapore."

Yet, others found Mr Singh's suggestion too "drastic" and "excessive". They warned against being too quick to point fingers at Reits as the culprit for rising business rents. Rather, they suggested that it could be a case of supply lagging demand.

CIMB economist Song Seng Wun said: "Everyone forgot while squabbling on the ground level who's to blame, but if you take a few steps back, it is because there is plenty of demand for space out there. Economics 101: this allows landlords to yank up rentals."

In this case, solving the supply problem may prove more effective. Patience is also needed because physical completion of properties takes time, he said. It may even be a good problem to have if landlords have no difficulty finding tenants for commercial and industrial spaces as this may mean Singapore has been successful in attracting businesses that want to expand here, he added.

Several commercial and industrial Reits that BT contacted did not want to comment, but an industry player who declined to be named said that Reits themselves also face the same problems of rising costs that tenants face, including labour (for security guards and cleaners, for instance), land rents and property taxes, which help to justify rent adjustments.

That is not to say that profit is not on Reit managers' minds when they revise rents. It is the landlords' playground now, and they are motivated to maximise their return on investment, given that they are listed vehicles and answerable to unitholders, said the industry player.

This leads them to raise rents when they think the market can take it, while taking care not to tip the balance, lest their tenants pull down their shutters and leave, which is not in their interests either.

For Reits, the question is "how much can you push prices before businesses need a breather?", noted CIMB's Mr Song.

On Monday, Nominated MP R Dhinakaran also warned of the danger of the speculative element in commercial and industrial property. "An asset value being pushed higher by several times makes little sense with no significant underlying change to the value offered to (the) tenant . . . If the asset value is fuelled by trading on a speculative basis without any underlying benefit changing (such as higher traffic for the tenant), it is bound to disrupt economics for the operating business," he said.

But the industry player pointed out that JTC has tightened conditions on lease assignments to discourage "flipping" - such as implementing longer prohibition periods before sellers can sell the property, as well as a longer minimum occupation period for anchor tenants in sale and leaseback programmes.