Relieving rental squeeze on SMEs

March 2, 2012  

 

Members of Parliament (MPs) this week sought to highlight the woes long faced by employers – particularly small and medium enterprises (SMEs) – posed by the policies in this year’s Budget aimed at re-structuring the economy.

This year’s Budget cuts dependency ratio ceilings (DRC) in the manufacturing and services sectors to slow down the growth of the foreign workforce. At the same time, it offered companies more incentives to encourage them to raise productivity.

No rational SME would question the need for re-structuring; what they question is the pace at which some of these policies are being phased in.

As it is, many are already struggling to cope with a high business cost environment. Even assuming that it is critical and imperative to raise productivity rapidly, what must have greatly disappointed most SMEs was the fact that the issue of rising rentals was left unaddressed. A special committee representing SMEs had requested in its Budget wish-list for JTC to stop divesting its properties to real estate investment trusts (REITS),

Examples of unintended consequences of the divestment policy cited by MPs include a 40-per-cent hike in rents at lease renewal faced by SME tenants at a JTC development in Toa Payoh.

The issue of raising productivity must be looked at from its broader perspective and not only from the labour side of the equation.

Holland-Bukit Timah GRC MP Liang Eng Hwa had commented that if land costs continue to rise, Singapore’s “international competitiveness will be eroded, even without labour cost increases”. Land costs and rental costs are related as higher land prices would feed into higher rentals.

The problems of SMEs deserve special attention. As labour chief Lim Swee Say put it, they are the largest employer in Singapore and an important link among economic clusters.

Improve process of releasing of land to market

At present the Government holds a near-monopoly when it comes to supplying land for housing and commercial development

In an ideal market place, there would be several sources supplying land for development. During the upward phase of a business cycle, many developers – responding to market signals – would rush to secure land.

The strong demand at the early stages of the cycle would then start to taper off when it is perceived to be reaching its peak, after which there would be significantly less demand when developers feel there is little upside to price and rental trends.

If there were three to four land suppliers, you can be sure that the release of land to the economy in the early stages of the cycle would be three to four times faster. If there is only one main provider, how much faster can it be?

As demand is satisfied much more quickly under an ideal market environment, there would be much less upward pressure on land prices.

Our present pace of releasing land may have been appropriate in the past when the Singapore economy was several times smaller than what it is today. But in an open economy where the business cycles are much shorter – which means a shorter time for developers to secure their land – and much more unpredictable, can our current system of releasing land keep up with demand?

If there are private sources supplying land, the sale can be done through private negotiation and need not always be sold by open tender. This helps to even out the competition between big and small developers and improve market efficiency.

Presently, big developers are able to muscle out their smaller counterparts almost all the time in state tenders.

Big developers tend to go for big projects while small developers build smaller projects which presumably would cater more to SMEs.

Ideally, we would like to replicate the conditions as though there were three to four alternative providers of land but there may be limitations when it comes to evening out the playing field between big and small developers.

Nevertheless, if we can just get the pace of land release right, there would be more land allocated to the market at lower prices. Presumably this would translate to lower rentals.

Address issue of rental volatility

Besides the high rentals, what must be more worrying for SMEs is the volatility of rentals. It is not the gradual 5 to 10 per cent increases that pose the greatest concern but the suddenness and magnitude of the rental spike as mentioned by the MPs.

It is important to ensure stability of rentals because how do you convince SMEs to set aside extra funds to train staff or buy additional capital equipment to raise productivity levels when the firm needs all its available cash to be on stand-by as a precaution for just such a scenario?

When prime office rents rose sharply a few years ago, there was a huge hue and cry from multinationals. They have been able to make themselves heard because they have economic clout. How about our SMEs? As some of them tell me, they have to adapt or die.

By Colin Tan – head of research and consultancy at Chesterton Suntec International.