Published April 18, 2007

Singapore must watch rent spiral

AFTER years in the doldrums, home rents are on the rise again. Office rentals, too, are on an upward spiral, and retail rents are seen rising too. All are indicators of a growing economy, and are generally welcomed, but there could be another, more worrying side to the story.

Rising rentals leave one key question in their wake: would it make Singapore less attractive to businesses, and to the foreign talent it wants to draw? Would the cost of doing business go up? Already, the revival in the office market has already made its impact felt, and has led at least one property consultancy, Colliers International, to warn that a continued rent hike could erode Singapore's competitiveness. According to Colliers, office rents in some prime areas in the first quarter have surpassed their 1996 highs. Gross monthly average Grade A office rent in Raffles Place, for instance, jumped 23.5 per cent from end-2006 to $10.63 per square foot in Q1 this year, after rising 66.5 per cent for the whole of last year. And the firm expects a further increase of at least 30 per cent over the next three quarters.

What this means is that Singapore may appear less attractive for businesses looking to move operations here. And those already here may think of relocation. An increasing number of companies here are reportedly already considering relocating their non-core operations out of Singapore. While the key finance sector appears unaffected so far - with global banks recently opening new offices here - that could change when business conditions become less upbeat and cost becomes a bigger issue.

The same scenario is played out in the housing market. After hitting a trough in the first half of 2004, private home rents have recovered - with the most marked increases coming last year - to the highest levels since 1999, going by the Urban Redevelopment Authority's rental index. According to Savills Singapore, rents for private homes have climbed 18.5 per cent in the past year alone. The HDB market provides little relief, with rents surging in the past 12 months on the back of spillover demand as rents for private housing climbed. The increases in HDB rents range from 8.3 per cent to as much as 44.4 per cent, according to property agency ERA. The upshot of all of this is that the cost of living for expatriates here is rising. Companies also face higher costs if they have to increase their housing allowances in order to attract foreign talent.

For retail businesses, a rental squeeze is already setting in. For the whole of this year, prime retail rentals are projected to increase by 8-10 per cent, while island-wide, rentals are expected to increase 3-5 per cent, predicted Knight Frank. The robust economy aside, one other factor behind this is the proliferation of real estate investment trusts (Reits) and the quest for higher yields.

Few can blame landlords from trying to ride the economic boom and extracting higher returns - it's demand and supply at work, after all. But Singapore needs to remain competitive, to attract and keep businesses and talent here, and the rental spiral is something that needs to be on the radar screen.