Steven and Otele delve into the hot topic of rising commercial rents in Singapore and their effects on businesses, citing the recent closure of Flo Patisserie in Siglap due to a staggering 57% rental increase. The discussion explores whether commercial rents are spiraling out of control or simply reflecting market forces.
The Free Market Economy in Singapore
Willing Buyer, Willing Seller
Ethan explains that Singapore operates under a free market economy where the government generally avoids intervening in price setting for businesses. This system relies on the principle of a "willing buyer, willing seller," meaning that rental prices are determined by market demand and supply. If a landlord prices themselves out of the market, tenants can choose alternatives.
Reasons Behind Rising Rents
Corporate Landlords and Retail Strategy
Amir explains that large corporate institutions like REITs and private funds develop retail strategies for their malls, dictating rental prices based on achieving targets promised to shareholders. They strategically lease different-sized spaces to various tenants, with supermarkets, for instance, paying anchor tenant prices.
Occupancy Cost Ratio
The concept of occupancy cost ratio, a key metric for corporate landlords, also influences rent. Different business types have different occupancy cost thresholds.
The Debate: Free Market vs. Regulation
A Need for Balance?
Amir disagrees that there is a "totally" free market and argues that a balance between a free market and a more managed or controlled approach is ideal, referencing HDB housing as an example of government intervention. He questions whether some commercial leases need similar control with "social-minded" objectives.
Vacant Units and Potential Penalties
Amir suggests potential regulations, similar to those for residential property developers, to discourage landlords from keeping units vacant for extended periods, preventing price manipulation.
Differing Perspectives on Regulation
Ethan maintains that commercial and residential spaces are fundamentally different. He argues that artificially propping up commercial rents through government intervention could damage Singapore's reputation as a free economy and reduce foreign direct investment.
Supporting Local Businesses
Retail Concepts and Incentives
Large retail landlords often aim for a mix of popular and independent concepts. To encourage unique businesses, they sometimes adjust rental structures to make it more attractive for them to move in.
REITs and Dividend Payouts
While some landlords attempt to offer flexibility for local businesses, REITs are often bound by commercial expectations and profit goals. This demand for dividend payouts mirrors the pressure smaller businesses face to be profitable.
Demand, Supply, and Regulation
A Question of Control
When there's high demand and low supply controlled by a few large landlords, prices naturally rise. The core question is not whether landlords are "evil," but whether the market has become uncontrolled.
Different Types of Retail Spaces
The retail market is varied. There is the sector of REITs and funds, also strata-owned spaces and public owned commercial spaces.
Addressing Fairness and Transparency
The Case of Fleur Patisserie
The example of Fleur Patisserie highlights the issue of fairness. A new landlord dramatically increased rent, exceeding what neighboring businesses paid. A potential reason is, the new landlord bought the property from the old landlord at a higher price.
Rent-to-Sales Ratio and Data Transparency
Historically, a healthy rent-to-sales ratio was around 15%, but now ranges from 20% to over 50%, impacting small businesses. The need for data transparency, similar to the residential market, is emphasized, though challenges exist with private leases.
Learning from Other Countries
Other countries, like Sweden, tie rental increases to inflation (CPI). Another proposal is profit-sharing models where rent is a percentage of the business's revenue, benefiting both landlord and tenant.
Turnover Rent and the Code of Conduct
A Win-Win Situation
The concept of turnover rent, where landlords share in the success or struggles of tenants, is gaining traction.
Government Intervention
While avoiding direct price control, the government supports local businesses through schemes like discounted rents for young and innovative businesses or social enterprises in HDB spaces.
The Price-Quality Model
The government has evolved in its approach to allocating public commercial spaces using a "price-quality model." This model evaluates proposals based on concept quality, community impact, and sustainability.
Future Directions
New Baru as a Model
New Baru exemplifies the success of evaluating proposals based on concept rather than solely on price. This model allows savings to be passed on to tenants and creates a unique and vibrant community.
Key Takeaways
To improve the market, the speakers suggest interference to help nudge the market in the right direction, price data transparency, addressing supply, reasonable anti-competition.
Alternative Models
The French 3+3+3 lease model can be taken as a reference. There is a legislation that tenants enter into a long lease with the landlord on a 3 plus 3 plus 3 year kind of lease. It gives a way out for the tenant to actually exit the lease at certain intervals, while at the same time locking in preferential rates in nine years.
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