REITs: Good or bad?

As small and medium-sized enterprises (SMEs) struggle with labour tightening in the push for improved productivity, they are also being squeezed by landlords demanding ever-rising rents.

Many businesses that lease commercial and industrial space, especially those under the real estate investment trust (REIT) structure, are hurting, and I must say, hurting real bad. Over the course of this week, Members of Parliament have called on the Government in the House to rein in industrial and commercial rents to help ease the burden on businesses.

Whenever I listen to the rental woes of SMEs, I am reminded of a report many years ago about a local coffee-shop chain that made it big. When asked by the reporter for the secret of its success, the owner said it just had the foresight of buying its premises in the early days of the business.

Does it mean that great success or failure simply boils down to whether the business owns or leases its premises? If you talk to the affected tenants, the answer is a resounding yes. Even those doing all right feel it could be a matter of time before they are squeezed by rentals. There is very little margin for error: All it takes is one business oversight or a stretch of poor sales.

It does not help that the supply of business space has always been behind the curve. Policymakers have always been quick to highlight the scarcity of land in Singapore. I think this is an excuse: It is not about the quantity but the type, mix and distribution as well. You need to get this right, too, because you can always find places where there are no takers for vacant space.

And when you have a scarce resource, you cannot simply leave it to market forces. In fact, rationing or spacing out the supply is already a form of intervention.

It is also not only about raising productivity by working smart. It is about moving up the value chain whether you are in a sunset or sunrise industry. Businesses that thrive or achieve higher productivity are usually helmed by creative leaders, but how do we nurture creativity when a lot of business ideas and entrepreneurial talent are nipped in the bud by the initial high rental costs?

Aside from the supply of business space, we also need to ask whether the REIT structure is partly responsible for the current woes of SME tenants.

Almost all the literature and so-called independent market reports are on the side of REITs, often extolling the benefits that these professionally-managed collective investment schemes bring.

However, academics and analysts lament the dearth of local data from which truly independent studies can be conducted to put the debate to rest. But nobody is volunteering this data, understandably not from the REITs themselves, but also from government bodies that possess some of these figures. More transparency is needed here.

To be fair, the REIT managers are simply doing their job and doing it well: After all, their rewards and salaries depend on how well they do. But why are the actions of REIT landlords praised in the past but not today? Then, they were lauded for breathing life into ageing commercial properties and livening up the business landscape. Has anything changed? As far as I know, they have been going about doing exactly the same things they were doing in the early days.

However, in life, there always has to be a balance. Too much of a good thing can eventually turn out to be detrimental and this may be so in the case of REITs. I know it is not very scientific and those who are always demanding proof before they act will never be satisfied. Not being able to prove something with data, or because of the lack of it, does not automatically make it an untruth.

The problem with REITs may not be so much with the structure itself, but their dominance of the business space landscape. Some describe the present market as akin to an oligopoly. How do we change this to make it more competitive? Do we limit each REIT to only a few properties to introduce more competition?

Nobody has the answers now but it is a problem we need to resolve urgently. If not, because the shares of local REITs are listed and easily tradeable, all of the benefits — especially if REIT managers have been very successful in raising value for unitholders — could eventually land in foreign hands.

Then we will become renters in our own country and have the life sucked out of us.

By Colin Tan – Director, Research & Consultancy at Suntec Real Estate Consultants

Source : Today – 7 Mar 2014

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