Helping SMEs Manage Rental Costs

The Minister of State for Trade and Industry (Mr Teo Ser Luck) (for the Minister for Trade and Industry): The Government's objective has always been to maintain a stable and sustainable property market where rentals remain competitive and affordable for businesses. We do so by ensuring that there is an adequate supply of space for long-term needs.

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Industrial rentals have been relatively stagnant from 2000 to 2006. Rentals saw an uptick in 2007, but declined during the Financial Crisis. In the second half of 2009, rentals started rising from a low base as our economy recovered. Rentals have since stabilised from last year. In general, rentals constitute between 3% and 7% of business costs for SMEs in the manufacturing sector but, of course, it depends on the different industry, different sectors where rental can be of a larger component. Over the next three years, an average of 500,000 sqm of multiple-user factory space will come on-stream annually. This is double the average annual space demand for such space in the last three years and is also expected to moderate industrial rentals further.

For retail space, URA's shop rental index rose by 2.9% and 2.6% in 2010 and 2011 respectively, before declining by 0.3% and 0.9% in 2012 and 2013. As retail leases are generally renewed every two or three years, tenants may experience increases at the point of lease renewal. Based on data from January 2012 to May 2013, the median increase in rentals upon renewal was in line with inflation. About one in 10 tenants experienced cumulative increases in rental of more than 50%, and these tended to be tenants renewing their leases after more than four years, or who had units in more attractive locations. Also, for about one quarter of tenants, rentals either remained unchanged or actually declined.

We expect retail rentals to moderate further. Over the next three years, about 145,000 sqm of new shop space will be completed each year. This is more than double the average annual demand for such space in the last three years.

The Government has, in the past, provided also tax rebates to help reduce business costs during severe economic downturns. Such rebates were provided from July 2001 to December 2002, and more recently, in 2009. In view of the current economic conditions which are relatively sound and rentals are also expected to moderate, such rebates and subsidies may not be necessary at the moment. I will continue to monitor the situation and determine if there is a need in future.

REITs are not leading players in the rental space market, as they currently own about 13% and 16% of retail and industrial rental spaces respectively. REITs typically select properties in locations that are more attractive, and invest in asset enhancement as well as undertake marketing efforts to increase foot traffic. These factors help explain why REITs are able to charge higher rentals. So, like any other landlords, they have to compete in the rental market to attract tenants.

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As rentals are driven by demand as well as supply, SMEs which operate in locations that are becoming more attractive will experience higher rentals. The Government is looking into publishing more comprehensive rental data for retail and industrial space to make the information more transparent so there is a sense of comparison and so as to provide the information on the overall rental market and also help businesses make some informed decisions and to make sure there is a fair practice so that they can consider their different options.

Mdm Speaker, I would like to ask the Minister of State: for the 5,000 sqm that come into the market annually, is this space developed by private developers or by Government agencies? I just had my dialogue session with SME owners who are my residents two days ago. Many expressed their concerns on rising rentals. I would like to ask the Minister of State if it would be possible to bring back the previous JTC kind of factories that were leased directly to the SMEs. The other thing is, will HDB be building more shops and more office space to lease directly to the SMEs?

Madam, it is not 5,000 sqm. It is 500,000 sqm – that is double the annual demand. That is both JTC development as well as private development, which means that it would be through the Government Land Sale (GLS) Programme. What JTC is trying to do now is to play a more developmental role which is really to help SMEs and start-ups. Recently, we launched a larger area for new businesses and start-ups. We are also clustering spaces by industry, for example, goods manufacturing. Industries that seem to lag behind in the productivity movement, we help them to intensify space usage, or we can call it land intensification. We will cluster and build purpose-built factories for these companies to use and keep a balance. The supply of space will increase tremendously. That should moderate the general industrial space demand.

For HDB, I guess I have to leave it to MND to answer that question. Through the SME Workgroup, we have MND and HDB representatives in there. We are all coordinating to make sure that we are monitoring all rentals throughout the different space, to make sure our SMEs do not face tremendous increases in terms of rentals. For reasons of making sure that there is fair practice and also making sure that the inflationary measures that may impact the rental cost, are reduced.

We are looking at all these different measures to see what we can do. Within this year, we will come up with more transparent data and more information in terms of a rental index to make sure that both tenants and landlords have a sense of where their rates are and how they can have a sense

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of comparison to make sure that rentals are fair throughout the location.

May I ask what proportion will be by land sales and what proportion will be developed by JTC directly?

I do not have the information at the moment. We will now have to plan to see how much out of the 500,000 sqm is for GLS and how much for development by JTC. I do not have that information; I could provide that later.

I would just like to ask the Minister of State what is the source of his information that the rental rate increases are generally aligned with the inflation rate? There seems to be some perception issues that are on the ground. I think it is quite important to address that. No matter what the Government says, that perception seems to be persisting. There are quite a number of data points that suggest that when retailers negotiate for a tenancy that is about to expire, they tend to get demands for increases as high as 100%. That kind of information goes around in the market. If that is the perception, I think that perception has to be addressed.

My second question would be when this data would be published. Do we have to wait until everything is available? If not, can it be done as soon as possible so that, again, that perception is addressed?

The data and the information that I have got is an aggregate, which means it is averaged out. There are different experiences and practices between landlord and tenants because of the contractual arrangements. At different locations, they will experience different commercial practices. The landlord may have a different mix of shops and tenants that they want, and so there are different types of contractual arrangements. That determines some of the rates that may apply to the tenants.

We are unable to go into such specific breakdowns such as by buildings. But on the whole, the intent is that as far as we can, we are looking for the sources that make sense. Perhaps by geographical points, within an area, and we can say how high or how low the rental index is in that area by comparison. We are still determining the sources and we are collecting the data and information with the help of associations and Government agencies. It is not just data from the Government agencies, but also from associations, practitioners and stakeholders of the market. We intend to do this and complete

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it within this year. We hope to do it as soon as possible, but we have to make sure that the data is accurate, comprehensive and complete.