Retailers say REITs are pushing up rental costs

Retailers say REITs are pushing up rental costs
By Linette Lim | Posted: 20 March 2013 2304 hrs
     
SINGAPORE : Real estate investment trusts (REITs) have become an investment darling in Singapore giving investors attractive returns.

But for retailers, REITs are causing them to cough out more in rents.

This is because REITs act mainly to boost returns for their shareholders.

President of the Singapore Retailers Association (SRA), Jannie Chan, says the higher rentals are adding to the woes in the retail sector which include a labour crunch and shortage of parking space.

Ms Chan says: "We've got the REITs killing us, we've got the labour killing us, and we've got no shopping (centre) car parks, so where are we going? So I think this is really (the result) of the government policies."

In Singapore, up to 75 percent of a retailer's costs are fixed costs such as rents and wages.

And over the years, the Singapore Retailers Association says rents, as a proportion of fixed costs, have risen relative to wages.

SRA says mall landlords like REIT managers raise rents by 5 to 10 percent every three years.

Ms Chan says: "(The make up of ) the fixed costs for retailers have shifted from 50 percent rental and 50 percent staff costs to 50 percent rental and 25 percent staff costs. The leases are short-term - it's renewed every three years. Each time there is a renewal, (the retailer or tenant) has to pay between 5 and 10 percent more."

She adds: "If your business is surviving, or doing well, you could afford that raise. But if not, you would then have to move, which means that the investments you have made over the last three years - the renovation, the staff - you may have to pull out. That becomes quite damaging, especially when you have been there for a long time and (are) there for the long haul within the shopping centre. So I think the REITs should be more mindful. If you have clients that over a period have been supportive of you, but during a certain period when there's a downturn in the economy, they could make adjustments and be more reasonable and more compassionate."

Speaking at the World Retail Congress, a retail industry event, which was attended by over 500 retail professionals, Ms Chan suggests that REITs could moderate their shareholders' expectations of yields.

And this can then translate to more reasonable increases in rents.

She says: "Perhaps there could be a policy to set the REITs off between 4 and 5 percent, instead of 7 to 8 percent. At the end of the day, it's what sort of returns (being delivered) to the investor. And at a time like this, when you've got very low interest rates, that seems to be compatible and reasonable."

Other industry experts say the problems that Singapore retailers face are not unique.

Ian Mcgarrigle, Chairman, World Retail Congress, says: "For Singapore retailers, the key issue seems to be the high fixed costs that they have to operate with - the rent that they are paying for space and the high cost of labour, and also the increasing scarcity of labour. They're not issues that surprise me - we hear them to greater or lesser degree around the world."

CapitaMall Trust (CMT) is one of the biggest mall landlords in Singapore.

A spokesperson from CapitaMall Trust Management says it is an industry norm to have rental reversions every three years, regardless of a REIT or non-REIT regime.

Some experts believe higher rents are justified as these REIT managers upgrade mall properties to improve its business mix and customer flow.

In the 2012 financial year, CMT revealed that it raised rents across its portfolio of malls by an average of 6 percent from preceding rental rates, typically committed three years ago.

"At an average of 2 percent a year, the change in rental is lower than inflation in Singapore," said the CapitaMall Trust Management Limited spokesperson.

The current inflation rate is around 4 percent.

The spokesperson added that the trust manager's approach is to partner its retailers to drive shopper traffic to their malls and increase their sales.

"For example, last year, we held 13 Biz+ seminars, workshops and classes in areas such as customer relationship management and visual merchandising. These initiatives help retailers to increase business in our malls," said the spokesperson.

Another major REIT manager, Frasers Centrepoint Trust management, was not available for comment.

- CNA/ch

- wong chee tat :)