Tackling rising rentals

How has the spike in office and housing rents affected business costs and competitiveness in your organisation and your industry? What can be done to moderate the impact on those adversely affected?

SINGAPORE’S strategic location as a regional hub and the government’s pro-business stance have attracted global attention to the island as a place to do business. One such success is the recent focus on wealth management, which has led to expansion of the rapidly growing private banking industry. It is a feather in the cap for the government to have several heads of private banking relocate to Singapore.

The present market imbalance between demand and supply has caused rents to shoot up, forcing many firms, especially SMEs, to relocate out of the CBD. Knight Frank’s own lease is due for renewal at the end of the year and we already have indications that the new rent is going to be 300 per cent more than the existing rent. We have to carefully evaluate and consider our needs for the next few years. I am sure many other SMEs are going through or have gone through the same process and are feeling the same pain.

Looking at the big picture, Singapore must be careful not to become a victim of its own success. If business cost here is driven too high compared with, say, Hong Kong and Shanghai, we may find global businesses relocating out of Singapore. This has happened before - for example, in our disk drive manufacturing industry.

It will take three to four years for space in new buildings to enter the market. In the meantime, perhaps several immediate steps can be taken to moderate the impact of high office rents. For example, rules on using industrial space for office purposes could be relaxed. To ensure that we do not unwittingly affect our competitiveness in the industrial sector, such relaxation can be location or zone specific.

Tan Tiong Cheng Managing Director Knight Frank Pte Ltd

THE rise in office and housing rentals has sparked some concern among AmCham Singapore’s 2,500 members. Because US citizens who work abroad are double-taxed, and because of recent cuts in housing allowances for Americans overseas, the rise in rents in Singapore could make it much more difficult for Americans to live and work here.

Left unmanaged, the rise in rents for business and personal needs could potentially have an impact on Singapore’s attractiveness as a site for American businesses interested in using the country as a base for regional operations.

AmCham Singapore hopes that closer monitoring by the Singapore government to try to mitigate the effects of speculation in the real estate market, combined with changes in US tax policies, will moderate the impact of the current rent rises on businesses and individuals, and allow more Americans to continue living and working in Singapore.

Douglas H Miller Chairman The American Chamber of Commerce in Singapore

AS a medical and security assistance services company, salaries and office rent make up a significant proportion of our operating expenses. Singapore is International SOS’s global headquarters and our key corporate functions are here. Hence a large number of our staff are expatriates. Escalating commercial and private rents are of concern to us as well and the services industry as a whole.

During the economic downturn in Singapore in 2001, we were very encouraged by the government’s determination to reduce business costs to keep the country competitive. With the economy improving, we are increasingly concerned that business cost-competitiveness in Singapore is becoming unsustainable.

For a mid-size and growing company like International SOS, the lack of cost-effective commercial rental options is a real business challenge. We hope the government can review and free up land to cater to business services companies like ours, while implementing measures to maintain salary and rental costs at a competitive and manageable level.

Tan Mui Huat Regional Managing Director International SOS

HIGHER rents are a necessary evil in a strong and growing economy. And I believe the increase in business as a result of a growing economy is more than enough to offset higher rents. HG Metal is not located in the Central Business District, where I believe the rental increase has been the most significant. Any rent increase in industrial areas has so far been manageable. In fact, we recently leased additional land of about 300,000 sq ft from JTC to cater to increasing business.

I think the free market is best left alone to set rental rates, especially in the CBD area. Businesses that do not have to be in the CBD would do best to relocate to fringe or regional centres like Tampines. This will free more space in the CBD area and mitigate further rent increases there.

Wee Piew CEO HG Metal Manufacturing Ltd

THE spike in office rents inevitably means higher costs for Cherie Hearts and the childcare industry in general. Of particular concern is that the cost of operating from Singapore could eventually become prohibitively high, so businesses are discouraged from setting up base here.

The government should free up more land for commercial use by reviewing the current plot ratios, especially for low-rise housing estates. Relaxing the height control would allow for more homes to be built on a smaller land area. The government could also release more land for office and residential use to cater for the projected rise in demand for these purposes.

Sam Yap S G Executive Chairman Cherie Hearts Group

WE were fortunate to secure our lease before the recent spike in office rents. But, we are also managing the cost of premises by locating some of our support services, like IT and operations, at Haw Par Techno Centre. We ensure connectivity by utilising technology like video-conferencing and Tandberg stations etc, so ‘face-to-face’ meetings can take place regardless of locality.

In addition, we are supportive of mobile offices, which means employees who are on the road constantly or who choose to work from home can book a workstation when needed. These initiatives help optimise our work space utilisation and contain cost.

David Wong Managing Director & Chief Executive ABN AMRO

A RISE in office rents may indicate a growing economy but it inevitably increases business costs and makes Singapore less attractive to businesses. Some may think of relocating operations to out-of-town locations, shophouses or other countries where business costs are less.

The competitiveness of business here could be eroded. Entrepreneurs may look at setting up online business and working from home to cut costs. Perhaps loans could be made more available for firms which are adversely affected by the record high rents, so as to help them tide over difficult times.

Dora Hoan Group CEO Best World International Ltd

COMPANIES can take the easy way out by moving to new premises - and they may not realise the inconvenience this may case to staff and customers. But competition is tough, and we are not a company that wants to give customers the wrong impression by doing such a thing. To maintain profitability and remain at our current premises, we may have to consider adjusting fixed costs, such as by reducing increments, minimising bonuses or even reducing marketing and advertising expenses.

Alternatively we can negotiate rent based on a longer lease. For a company to function efficiently, it should not be troubled by rental and labour force issues. But the reality is that there are many unpredictable influences we must be prepared for at all times.

Thomas Ting Managing Director TJ Systems (S) Pte Ltd

OPERATING budgets are affected when organisations face higher office and housing rents. We have felt this more so, because most of our previous leases were drawn post-9/11 when real estate costs hit rock bottom. The sudden spike now when we have to renew them was expected but is still a shock.

The recent reduction in corporate tax should help compensate in some way. Organisations should think of creative means to soften the impact of higher rents by cutting other costs that are more within their control.

That said, rather than focusing on the negative, we choose to view rising rents as the sign of a robust economy. Overhead costs are up - but so are the opportunities for incremental revenue generation and overall business growth. Smart organisations will take this in as a cost of doing business and get on with accelerating their growth within a buoyant economy.

Deb Dutta Vice-President of Asia Pacific/Japan Brocade

IT is inevitable that office and housing rents reach today’s dizzy heights. This is a consequence of our country’s strong economic growth. Given that land is a scarce resource, I expect rents to rise even more as Singapore progresses. It is only a matter of time before the gap closes between Singapore and Hong Kong, Tokyo and perhaps even Mumbai. This is obviously bad news for many businesses, especially SMEs.

Going forward, companies will be forced to make some tough decisions. For businesses that are adversely affected, an obvious way to reduce the impact is to relocate to a less-expensive non-prime location or cheaper country in the region. The other option, which will appeal to more companies, is to embrace telecommuting and encourage employees to work from home.

In the longer term, at the strategic level, Singapore companies will be compelled to change their business model or diversify into a higher-margin business to stay viable and to grow. The last thing businesses should do is to expect the government to intervene and regulate the market. I believe market forces will weaken the hand of the government in this area, going forward.

Lim Soon Hock Managing Director Plan-B ICAG Pte Ltd

I BELIEVE the increases have been driven by market fundamentals, so there is little the government can or should do. Action taken now would be liable to distort the market. What may help to ameliorate the current office space crunch is to revisit the rules for HDB home offices and see if these can be relaxed further.

For Freight Links Group, office rent is not a main concern because we own most of our office space. In fact, our property division, which specialises in commercial solutions for warehouse and office space, helps us manage our exposure to market movements.

Eric Khua CEO Freight Links Group

TANDBERG has recently moved to a new and bigger office in the prime business district. While it has definitely become more expensive to rent office space, this is a clear reflection of the improving and growing economy. When a lease expires, there is plenty of forward notice. Organisations should take full advantage of this lead-time to achieve the best possible financial and operational outcome so as not to be severely affected by these increased costs.

Lars Ronning President, North & South East Asia, Australia & New Zealand, Tandberg

IT is definitely a matter of concern that the cost of doing business goes up, as this could erode Singapore’s competitiveness. Businesses that could be adversely affected will probably migrate to lower-cost environments, particularly for their non-core activities. For the moment, bullish market forces are in full play and businesses and companies are paying up. Lack of availability of quality office space in the downtown area, particularly large office spaces, is an issue for firms looking to bring some operations into Singapore.

On the positive side, Singapore is still only the 17th most expensive office location, not higher up the list. Farther away from the business districts, rents still seem reasonable. As part of the natural evolution there will be a trade-off. Operations that can afford to be in Singapore will remain, mainly due to other considerations such as quality of infrastructure and quality of life and family considerations. Others will move out if rents and property prices remain high.

For us, rent constitutes about 7 to 8 per cent of our overall expenses, and at the moment the spike is not really an issue. But it could assume more importance in the case of an economic downturn. What can be done? The government will have to let the cycle run without drastic steps but can temper it by releasing more land and, if possible, helping to make more downtown office space available. But all this may not have too much of an immediate impact, as there are global forces at play.

Vijay Iyengar CEO Agrocorp International

THE current property boom is a world phenomenon. It is the net effect of Asian investors who are flush with cash due to export earnings from manufacturing and back-office services and the Western counterparts and institutional investment funds which are demanding riskier but higher yield returns.

Singapore is additionally, due to prospects of the IRs, a world and global city in the making. The property boom is still in its early stages. To moderate the spike in office and housing rents, early thought on cutting space, moving away from the CBD area, split operations, working from home and selling and leasing back space may help.

Tan Kok Leong Principal TKL Consulting

THE recent property boom poses a problem - not just for SMEs, who need to keep fixed costs low, but also for Singapore, as rising prices start to erode its cost-competitiveness.

Emerio had been thinking of acquiring more office space to cater to its expansion plans this year. But costs are getting prohibitive, so moving additional headcount to Malaysia is becoming a more attractive option. The alternative is to go for a mobile workforce. Either way, it will complicate our lives.

Harish Nim Chief Executive Emerio Corporation Pte LtdSource: The Business Times, 30 April 2007