Thursday 22 May 2014

REITs not to blame for rising retail rents: MTI survey

MTI debunks perception of widespread retail rent spikes
But findings met with scepticism from SMEs, retailers and property watchers
By Teh Shi Ning, The Business Times, 21 May 2014

A quarter of the retailers who renewed shop leases last year did so with no rent increases or lower rents, and most retailers faced rental hikes that were in line with inflation over the period of their lease, the Ministry of Trade and Industry (MTI) said yesterday in a finding that could surprise many.

MTI's analysis of retail rental renewal trends, published for the first time in the latest Economic Survey of Singapore (ESS), sought to put in context some retailers' concerns over the steep rent increases they face when renewing contracts, even as the official retail rental index went down in 2012 and 2013.

A related study, also published in the quarterly ESS, found "no evidence" as well for the growing perception that real estate investment trusts (REITSs) are driving up retail rents. But this finding was met with considerable scepticism by small and medium-sized enterprises (SMEs) and property market watchers The Business Times spoke to.

The broader study used retail rental transaction data for 2000-2013 from the Inland Revenue Authority of Singapore (Iras) to "more closely approximate the experience of retailers on the ground". MTI found that, while this can vary greatly, most increases were in line with the rate of inflation.

On average, out of the 2,100 leases renewed each year, rents are doubled or more than doubled in one per cent of them. These tended to be leases renewed after longer periods, or leases for shops in more attractive locations, MTI said.

But most of the rental hikes were not as dramatic. The median cumulative increase last year was 5.5 per cent, and 75 per cent of the leases were renewed at rental increases of 14 per cent or less.

In fact, in every year from 2000 to 2013, up to a quarter of retailers had the same or lower, rents on their renewed contracts, a proportion market watchers such as Teo Li Kim, research director at Cushman & Wakefield, found surprising.

MTI permanent secretary Ow Foong Pheng said at the press briefing yesterday: "People who don't experience any increase are quite happy to keep silent and the ones who are feeling the pain of big increases would make more noise, it could be that that's the case ... We're not disputing that some do experience significant increases but it's a small number."

Association of Small and Medium Enterprises (ASME) president Kurt Wee, who raised the issue of sharp rental revisions hurting SMEs earlier this year, yesterday reiterated his call for more data.

"The effective rents are not transparent in the market. This means retailers are unable to plan and are subject to the sales tactics of landlords. It would be wonderful if every organisation has access to this data (from Iras)" he said.

MTI said that more comprehensive retail rental data can be expected at the end of this year. "Existing retail companies looking to renew their leases or new retail companies looking to set up shops will be better placed to make more informed decisions on where to locate their shops to enjoy more competitive rents in the future," the report said.

A second study, by MTI economists Bali Kaur Sodhi and Leong Chi Hoong, found that the higher rents at REIT-owned malls are due to their better location and renovated features - not their ownership by REITs.

The economists noted that a casual observation of rental trends would show that REIT-owned malls have higher rents than single-owner malls, and a higher compounded annual growth rate of 20 per cent between 2009 and 2013, compared to single-owner malls' 9.2 per cent. They think this fuelled the perception in recent years that REITs are driving up retail rents - which was also raised in Parliament last month.

After controlling for characteristics such as asset enhancement works and how far a mall is from an MRT station, the economists found the level of rents in REIT-owned malls to be statistically no different from those at single-owner malls. Controlling for those characteristics, rental growth of REIT-owned malls between 2009 and 2013 also falls to 8.4 per cent, closer to the 6.7 per cent for single-owner malls.

But this need not mean that REITs are not responsible at all for the overall rise in retail rentals, market watchers said.

After all, many property companies take reference from each other's practices and prices, said Nicholas Mak, executive director of research & consultancy at SLP International Property Consultants. "What is undeniable is that the ownership of shopping malls is getting more concentrated in a smaller number of owners, which implies less competition," he added.

Chia Siew Chuin, director of research & advisory at Colliers International, also noted that in Singapore, a few prominent property developers and owners control much of the existing shopping mall stock for investment, which excludes strata-titled retail space. And regardless of ownership structure, their objectives and strategies are often similar.

"If the stock in quality shopping malls can be sufficiently larger, with more developers or landlords adding greater diversity to the retail sector, retailers could then have more options and greater flexibility in their choice of malls, hence accommodating a wider variety of business cost thresholds," Ms Chia said.

To the SME, there is no difference between REITs and other large, well-financed institutional landlords, said ASME's Mr Wee. To him, the CAGR rental growth of 20 per cent from 2009-2013 cited in the study merely confirms aggressive pricing behaviour on the part of REITs. "They are the price leaders and the price setters," he said.

And from a retailer's perspective, HomeFix DIY managing director Low Cheong Kee thinks that REITs do hold better located malls for better fittings and costlier renovation. "But other mall operators are also benchmarking against the REIT-owned malls, thus pushing overall rentals up," he said.

The MTI economists acknowledged that their study was limited, as it does not include indicators that affect how much mall owners can charge their tenants, such as footfall and profitability, for which data was not readily available.

REITSs may play 'major role in shop rent hikes'
By Melissa Tan, The Straits Times, 28 May 2014

REAL estate investment trusts (REITSs), which own numerous malls across Singapore, may play a major role in shop rent hikes, business leaders say.

Their views come as a Ministry of Trade and Industry (MTI) study last week found that REIT-owned malls command higher rents, likely because of their better locations and maintenance.

The rent hikes at some REIT-owned malls may also outpace revenue gains from having a shop there, the business leaders told The Straits Times.

They added that apart from rising rents, another huge worry for retailers was a power imbalance in favour of landlords.

Rising rents for retail space, which bump up businesses' operating costs, have come under rising scrutiny in recent weeks.

Minister of State for Trade and Industry Teo Ser Luck acknowledged in Parliament on Monday that rent hikes by one landlord can affect the rest of the rental market, though he did not explicitly mention REITs.

"When the rent increases, whether from different organisations, it does impact," he said. "There is a signalling effect, but it may not be a dominating effect."

The MTI study noted that REIT-owned malls "seem to enjoy higher rental growth" than malls owned by single non-REIT landlords. But it said the gap largely vanishes after accounting for mall characteristics such as refurbishments and distance to the nearest MRT station.

Retailers are not totally convinced, however.

"Businesses have given us feedback to say that the study conclusions seem hasty and unconvincing," said Mr Victor Tay, chief operating officer of the Singapore Business Federation.

Mr Kurt Wee, president of the Association of Small and Medium Enterprises, told The Straits Times that the MTI study sparked an "outcry" in the food and beverage and retail scene.

The analysis was not comprehensive enough to conclude that REITs may not be the main drivers of rent hikes, Mr Wee said, adding that many smaller firms have reported double-digit rent increases this year.

He said the study also did not address "non-price" issues like lack of transparency about rents and unfair tenancy agreements.

MTI acknowledged in its study that it did not include some factors that can affect how much rent mall owners charge in

its analysis, such as visitor numbers and retailer profitability, since these were not readily available.

Mr Tay said the small size of Singapore's retail space market, largely controlled by just a handful of firms, meant that one landlord's move could quickly influence others to follow suit.

"They may all have a spillover effect on each other."

So even if rents climb in tandem at REIT-owned and other single-owner malls, this could "still be interpreted as REITs actually being the price leaders".

Adding that several local shops have closed due to unaffordable rents, he said the situation could make it tougher for local retailers to survive and grow.

High rents in hot spots due to competition
But there are pockets of retail space where rents have fallen recently
By Melissa Tan, The Straits Times, 29 May 2014

SOARING rents have forced retail executive Anil Konidena to shut two of his firm's stores in Singapore with more to soon follow.

"Rent escalation in Singapore is completely disproportionate to sales growth," Mr Konidena, chief operating officer of RSH Limited, told The Straits Times in a recent interview.

"It's disconnected with the fundamentals. Rental can be anything as long as it's affordable, and it's affordable when it's a smaller proportion of total sales."

Many retailers are bemoaning the fact that higher rents combined with ballooning labour costs are eating away at their earnings.

Analysts noted that competition for limited space in popular destinations is driving up rents, as demand for these spots outstrips supply.

"Where vacancy in the retail market is tight, landlords... of better-performing malls will be able to exert more control over the setting of rents," said CBRE research head Desmond Sim.

Retailers in the prime shopping belt along Orchard Road may also have to compete with international players with deeper pockets, analysts said.

However, they predict that retail rents could weaken this year due to lower tourist spending - even for prime Orchard Road space - but that might bring only partial relief.

Inflation and a manpower crunch will "further increase the already high business costs in the prime shopping area", making it tougher for shops to keep afloat, said Savills research head Alan Cheong in a report yesterday.

RSH's operating costs are so high that Singapore now has the biggest proportion of loss-making stores out of the 14 countries the firm operates in, Mr Konidena told The Straits Times.

"That's including Hong Kong and Australia, (both) high-cost markets. Even in Australia, where the store operating hours are shorter, we have a smaller proportion of loss-making stores."

Rent, which made up 32 per cent of retailers' costs in 2011, and the issue of its sharp rise, have come under the spotlight in recent weeks.

RSH, which has stores selling high-street clothing labels such as Zara, Mango and Stradivarius, leases around 130 shops here. Its rents can go up by anywhere from 3 per cent to as high as 30 per cent upon renewal depending on the store, said Mr Konidena.

"If we are finding it so challenging, what about the smaller, independent, one- or two-brand retailers?"

Pure shops are not the only types of retailers feeling the heat.

Food and lifestyle group Spa Esprit, which is behind well-known brands such as Skinny Pizza and Tiong Bahru Bakery, also told The Straits Times that its rents have gone up in recent years.

Founder and managing director Cynthia Chua said rents have generally risen by 10 to 20 per cent a year for its stores located in malls.

Rents for some non-mall shops such as its eateries in Tiong Bahru have as much as doubled, she said, though she noted that the initial rent was a "low base".

"On top of rental, there's also manpower issues and food costs," she added.

However, not all parts of the island have seen a relentless rise in retail rents. Just a minute's walk from the gleaming facades and polished corridors of the newer malls lining Orchard Road, there are pockets of retail space where rents have fallen recently.

Some units have been vacant for months in the strata-titled Lucky Plaza, for instance, said tenants there when The Straits Times visited earlier this week.

Private investor Sameer Aswani told The Straits Times that he lowered the rent at his shop in People's Park Complex in Chinatown earlier this year.

"I dropped the rental in January from $6,500 to $6,200 or my tenant was going to move," he said, adding that he has kept rents steady at his shop in Sim Lim Square.

Bukit Timah Shopping Centre is another mall that has seen rents fall recently, analysts said.

A study by the Ministry of Trade and Industry last week found that up to a quarter of retailers every year would have no rent increase or would even see their rents drop when they renewed.

Economy grew 4.9% in first quarter, boosted by factories
By Chia Yan Min, The Straits Times, 21 May 2014

SINGAPORE'S factories powered the local economy to a better than expected start to the year as the outlook for the global economy grew more sanguine.

The economy expanded 4.9 per cent in the first quarter over the same period last year, with manufacturing leading the charge as key markets bought more Singapore-made goods.

For the full year, the Ministry of Trade and Industry (MTI) continues to expect the economy to grow "modestly", at 2 to 4 per cent.

MTI said US consumers and businesses are set to spend more this year, while the euro zone is likely to return to growth.

This is expected to lift export-dependent sectors like manufacturing and wholesale trade.

Compared with the October to December period, the economy grew 2.3 per cent in the first quarter - nearly double a 1.2 per cent median estimate by 13 analysts polled by Bloomberg.

Labour productivity rose a meagre 0.9 per cent in the first quarter from a year earlier. Still, this was its highest level since the third quarter of 2011 - boosted mainly by productivity gains in the manufacturing sector.

Manufacturing, accounting for a fifth of the economy, grew 9.8 per cent over the same period last year in the first quarter, largely driven by strong growth in biomedical and chemicals.

But the tight labour market and pressures from restructuring kept weighing on business at home.

Trade statistics for the quarter, also out yesterday, showed a 1 per cent dip in non-oil domestic exports, smaller than the previous quarter's 2.1 per cent slide.

Despite MTI's upbeat outlook on developed economies, it also noted more uncertainty over the pace at which the US Federal Reserve will wind down its massive bond-buying programme. An unexpected hike in interest rates would hurt the global economy.

Slowing growth in China, the world's second-largest economy, also poses a risk.

Most economists cheered the first quarter's strong showing, but others warned the uptick in manufacturing might not last.

DBS economist Irvin Seah said the pharmaceutical and petrochemical industries - which propelled manufacturing expansion in the quarter - are volatile.

"It is difficult to count on the predictability of these clusters to sustain growth," he said.

Meanwhile, the electronics cluster - about a third of manufacturing output - appears to be losing momentum, he added.

M Metal's managing director John Kong said the year so far has "not been brilliant, but still satisfying". It makes metal products for the construction sector.

The latest numbers were affected by a regular update in the way the Department of Statistics derives its data. It is now using 2010 as a base year, not 2005.

This partly accounted for a reduction in the year-on-year growth figure to 4.9 per cent from an earlier estimate of 5.1 per cent. After the base year change and other tweaks, 2013 full-year growth was revised to 3.9 per cent, from 4.1 per cent.


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