Rent Hikes: Why Landlords Are Not Always To Blame

Rent hikes have made the news in the past month. One viral story was of Flor Patisserie announcing its closure in Siglap due to a reported 57% rent increase. The discussion that has sparked since covers many different viewpoints, including calls for more Government intervention, even to the point of bringing back the Control of Rent Act, which was repealed in 2001.

Rent control was originally introduced following the end of World War II to protect tenants from unscrupulous landlords during the post-war housing shortage. In 2001, with greater home ownership in Singapore, the need for such laws became less relevant, and the decision was made to encourage a free market model.

A free market model is one where prices are dictated by a “willing buyer and willing seller”, or in the case of commercial spaces, a “willing landlord and willing tenant”. The criticism from tenants has been, to use the words of Flor Patisserie in their viral post, “landlords hold overwhelming negotiating power”.

Obviously, in the case of Flor Patisserie, a 57% increase in rent, from $5,400 to $8,500, justifies that sentiment. Tenants are put in the tough position of either closing their outlet or absorbing the increase in cost and passing it on to their customers, which is likely to affect their business.

But is this the case of landlords having a power imbalance, or are all landlords being tarred with the same brush due to a handful of unscrupulous landlords?

Why Are Landlords Increasing Rental Rates?

In a free market like Singapore, landlords come in different shapes and sizes. Several real estate investment trusts, or REITs, for example, own many retail assets in Singapore, while there could also be other landlords who own just one property.

Frasers Centrepoint Trust, for example, owns many suburban malls in Singapore in its portfolio, such as Tampines 1, Hougang Mall, Tiong Bahru Plaza, and Causeway Point. As I learnt at the recent REIT Symposium, REITs in Singapore are evaluated according to several metrics, including occupancy rate and positive rental reversions.

A positive rental reversion rate indicates that tenants are signing new leases at higher rental rates than before. This reflects the REIT’s ability to build value for tenants and attract tenants willing and able to pay the higher rents – which ultimately mean a better return for unitholders of Fraser Centrepoint Trust.

In April, Frasers Centrepoint Trust announced a +9.0% rental reversion rate while maintaining 99.5% occupancy.

Each REIT will have its own strategy to achieve these results, such as determining the tenant mix by setting competitive rental rates. Therefore, while there is an incentive to increase rates, the need to ensure occupancy will mitigate any unreasonable rate increases.

Landlords also take on a significant level of debt, which is why the debt-to-equity ratio or gearing ratio is another metric by which to evaluate REITs. With the high interest rate environment over the past several years, the cost to service commercial property loans is sometimes passed on to the tenant in the form of increased rents.

Strategising around these metrics has the unfortunate side effect of attracting the same retail chain tenants across several malls in Singapore, since they can maximise earnings by enjoying economies of scale. Simultaneously, they end up pricing out smaller, unique businesses that are unable to keep up with the increased cost.

What Is Being Done For These Smaller Businesses

While we are far from the days of rent control, the government still can influence commercial spaces since it is still the biggest landowner in the country. Over the years, it has used a Price Quality Method (PQM) framework to award tenders, ensuring that price alone is not the sole determinant, and encourages projects that emphasise concept, community impact and sustainability elements over costs.

The Singapore Land Authority (SLA), as the steward of many state properties, utilises this “price and quality” tender process to transform some of their vacant sites into exciting new destinations. The good example of this is the recent launch of New Bahru, which uses the former Nan Chiau High School at River Valley to house a diversity of over 40 local brands including Chalk N Pencils, a fine art studio, MAKE by GINLEE, an experience-based concept store, and SOJAO Home Goods Store.

HDB also awards tenders using the PQM and has also introduced several measures to help their retailers remain vibrant and inclusive, including the Social Enterprise Policy, and the Enhanced Entrepreneur Scheme, which offers rental discounts for three years for social enterprises and start-ups respectively.

However, it is perhaps still too early to say if these supportive measures are enough to strike a balance between free market forces and vibrant entrepreneurial economy.

Fair Tenancy Code Of Conduct

This is why the Fair Tenancy Industry Committee was formed in 2021 to be the custodian of an industry-led Code of Conduct, currently in its third edition. The Code of Conduct provides guidelines that enable fair and balanced lease negotiations between landlord and tenant, as well as providing a process for the resolution of disputes.

The Lease Agreements for Retail Premises Act 2023 took effect on 1 February 2024, mandating compliance with the leasing principles in the Code of Conduct. The Code of Conduct applies to all qualifying retail leases with a tenure of at least one year.

With the introduction of these fair tenancy laws, the hope is that greater transparency, equity, and sustainability in retail leasing practices will reshape the current landscape for both landlord and tenant.

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