Finding cheaper space for SMEs

Finding cheaper space for SMEs

Until there are more details on JTC's divestment plans, the future of SMEs remains hazy, says JANICE DING


SINGAPORE'S industrial property market has seen dramatic movements in terms of supply, demand and occupancy in the last decade. After enjoying a golden period resulting from the economic surge of the 1980s, the industrial property market sank into the doldrums between 1997 and 2003 with a number of successive setbacks including the Asian financial crisis in 1998, the dotcom bust as well as a global downturn and electronics slump in 2000, the Sept 11, 2001 terrorist attacks and avian flu in 2003.

From 2003, the recovery of the global and local economies led to the revival of the manufacturing, logistics as well as research and development (R&D) sectors, the main drivers of industrial space. Combined with strong government support in offering various manufacturing incentives and supporting R&D and logistics sectors, demand of industrial space enjoyed four consecutive years of increase from 2003.

With the limited number of new industrial completions coupled with buoyant demand led to a strong recovery in occupancy rates from the bottom of 86.7 per cent in 2003 to reach 90.3 per cent in 2006, the highest rate since the 9/11 attacks.

The breaching of the 90 per cent mark in occupancy rates finally spurred rents of conventional industrial space to rise from Q2 2006 after some two years of stagnancy over 2004 and 2005. Rents of the upper floors of prime factory space rose 12 per cent to $1.31 per square foot (psf) per month as at December 2006 after having hovered at $1.17 psf between end-2003 and early 2006.

Rents of high-specification space picked up earlier from end-2004 due to robust demand from R&D and high value-added industries. As at December 2006, rents of upper floors of high-specs space stood at $2 psf per month, rising some 21 per cent from its lowest point of $1.65 psf at end-2003. Prices of conventional prime leasehold industrial properties have also started to trend upwards with the rise of rents, although those of its freehold counterparts remained resilient despite the improving demand.

The SME sector is critical to Singapore's economic well-being and plays a key role in attracting multinational corporations to locate in Singapore

Upper floors of prime leasehold industrial properties stood at $180 psf as at December 2006, rising some 18 per cent from its recent low of $152 psf in 2004 while those of its freehold counterparts remained unchanged at $327 psf per month since 2005.

The year 2006 proved a good one for Singapore with a strong 7.9 per cent growth in gross domestic product, powered by the manufacturing sector. While big multinational names such as Shell Eastern Petroleum, Samsung Electronics-Siltronic, Intel and Micron catch all the attention with their billion-dollar investments in Singapore, quietly toiling unnoticed are the small and medium-sized enterprises (SMEs) that are no less important in their contribution to Singapore's economy.

It may come as a surprise to know that out of the 130,000 business establishments housed in the republic, SMEs take up the lion's market share at 92 per cent. SMEs are the key drivers behind innovations and creative entrepreneurship. They are also a key driver of the economy, contributing up to 25 per cent of Singapore's GDP and employing more than half of Singapore's workforce, according to the Association of Small & Medium Enterprises (ASME).

The resilience of SMEs is also astonishing. During the recession of 2001 and 2002, employment by Singapore SMEs rose by 6.6 per cent when those of multinationals dropped by 1.7 per cent. Undoubtedly, the Singapore SME sector is critical to Singapore's economic well-being and plays a key role in attracting multinational corporations (MNCs) to locate in Singapore. Thus, the interests of this sector should be safeguarded.

For a long time, the government has taken pains to nurture the survival of the SMEs from various aspects. The most significant of these is its effort to provide for the real estate needs of SMEs in the form of flatted factories built by JTC Corporation (JTC). Flatted factories are the most common type of accommodation used by SMEs as they are smaller than the single-user factories. Flatted factories also represent the lowest rung of the multi-user industrial property pyramid in terms of rentals. Rents of JTC's flatted factories are about 35 per cent cheaper than those of multi-user factory space provided by the private sector, and this excludes rebates given by JTC during downturns. This is an important factor in assisting the survival of many SMEs, particularly start-ups.

Hence, when JTC announced in 2005 that it would evolve out of its role as a major industrial public developer and landlord by first divesting almost half of its ready-built facilities, it was only natural for SMEs to feel uncertain about their future. With private landlords in place, gone would be the enjoyment of direct protection from JTC in ensuring affordable real estate costs.

On the other hand, if the divestment brings in many players, this could result in a vibrant marketplace with healthy competition for the flatted factory-leasing segment with the happy outcome of improved products and competitive rents. Hence, privatisation of public property is a double-edged sword that could either result in a more competitive market environment beneficial to the market at large, or a monopolistic or oligopolistic market that could hurt the SMEs.

In early 2007, the news came that there would be two modes of divestment for JTC's ready-built facilities: one through the creation of a single self-sponsored Reit and one through a trade sale. The uncertainty now remains as to which properties in the divestment portfolio would be divested via a Reit, and which via a trade sale. Needless to say, a major concern of the SMEs would be that a significant proportion or all of the flatted factories in the divestment portfolio would be divested via a single self-sponsored Reit.

This concern stems from the fact that JTC's entire flatted factory portfolio as at end-2006 constitutes some 36 per cent of the island-wide conventional flatted factory leasing market. Depending on the quantum of JTC's flatted factory space that would be divested via a Reit, the Reit could end up holding a substantial market share of the flatted factory leasing market and thus have monopoly power over this segment of the market. This situation is a highly probable one considering that the next largest private sector player in this market segment, Ascendas Reit, holds less than 10 per cent of the market share.

A monopolistic situation controlled by a private sector player, particularly a Reit, in the flatted factory leasing market would have profound implications for the market. As Reit managers owe their unit holders the responsibility of maximising yields, the fund manager of this single Reit would likely take full advantage of its position as a major player and raise rents.

Hong Kong's Link Reit offers a good example of a possible scenario should the bulk of JTC's flatted factories be divested via a single Reit. Listed in November 2005, Link Reit was the vehicle by which the Hong Kong Housing Authority (HKHA) divested some of its commercial space previously run as a service to low income tenants in the housing estates.

After the listing, the manager of Link Reit sought to raise rents of these properties. This has caused discontent among the tenants and sparked off protests by thousands of workers affected by the possible closure of the shops in the estates. The negative publicity is now forcing policy makers to think twice about selling off public assets in future.

This possibility of increasing rents of JTC flatted factories in Singapore's context would similarly put our SMEs in an equally precarious situation as there are few alternatives to JTC's flatted factories. Private multi-user factories built from government industrial land sales are mostly sold on strata basis rather than held for lease, while independent high-specification space and business park facilities only take in tenants of specific industries, usually related to technology or research and development. Rents for these alternatives are also significantly higher, and could be as high as 135 per cent more than those of JTC flatted factories.

Stuck between a rock and a hard place, where can the SMEs find affordable room for themselves? Till there are more details on JTC's divestment plans, the future of SMEs remains hazy. The writer is senior analyst, research and consultancy, at Colliers International