REAL Estate Investment Trusts (Reits) were once hailed as the saviours of Singapore’s shopping malls. The theory was that single-owner malls would never match malls run by Reits. And at first, that seemed obvious. After all, compare malls like Sim Lim Square and Ming Arcade (single-owner) to Plaza Singapura and Bugis Junction (run by CapitaLand). The latter command higher rents, are more actively promoted, and don’t expose you to at least seven different diseases when you sit on the toilet bowl. But in a recent Business Times report, there’s a hint that the opinion has changed:
How are Reits turning into the villain of retail?
In a recent Business Times report, a number of people were consulted on the reasons for Singapore’s struggling retail scene. With a vacancy rate of 8.8 per cent in the Orchard area, it’s become a hot button topic. Most of the responses covered the oft-repeated reasons: a decline in tourism, the rise of online shopping, economic uncertainty, and so forth. But some responses, such as these, stood out:
“The decline of mainstream retail can be explained by Reits, lack of transparency and online retailing. Most of the retail space in Singapore is owned by Reits whose singular objective is to maximise profits in the short to mid-term.” – Paul Lim, Chief Executive Officer, Secura Group Ltd.
Also:
“The biggest problem is that investing in real estate is still considered to be a relatively easy way of making money…Together with Reits, this inevitably leads to an oversupply of retail space. That there is now much empty retail space is partly self-created by players in the real estate industry.” – Lim Soon Hock, Managing Director, PLAN-B ICAG Pte. Ltd.
Putting the blame on Reits is not a recent development. In fact, we already heard grumbling back in 2014. During the Budget Debate that year, Worker’s Party Non-Constituency Member of Parliament Yee Jenn Jong brought up the issue. He was addressing the perception that Small and Medium Enterprises (SMEs) were being pressured out of business by Reits, which constantly seek to raise rental rates.
In order to understand the conflict, we need to grasp the basic idea behind retail Reits.
The role of Reits
It’s hard to find common ground here. Depending on who you ask, Reits are either the great hope for Singapore’s malls, or abusive landlords who beat their tenants like stepchildren in a fairy tale.
The point of a retail Reits is to let investors play landlord, without actually buying property themselves. When you buy units in a Reit, you pool your money with other investors to buy retail space (e.g. Malls like Funan Centre). You, along with other shareholders, get dividends based on the rental income that the Reit is able to collect. The more profitable the Reit’s malls are, the more money you make.
Retail Reits use property managers to decide which malls to buy, and undertake Asset Enhancement Initiatives (AEI) to make the mall more attractive. This is why malls run by Reits are all shiny and clean, and why they constantly have the best Christmas decorations, New Year promotions, Valentine’s events, etc.
In theory, this means Reits are good for malls. Now I’m not going to name and shame, but we all know there are malls in Singapore that look like post-war Stalingrad. Run down, with entire floors of vacant shops, and the sole decoration being a Christmas tree the security guard put up in 1978.
Reits mean active asset management, and state of the art malls that are built to pull shoppers. That should be a good thing; the better a mall looks, the more business its shops will get. But then, there’s also…
The dark side of Reits
One reason Reits are so attractive is that they’ve been great passive investments (at least, until recently.) By law, Singapore Reits have to pay out 90 per cent of their profits as dividends. They need to publish quarterly reports that detail foot traffic, the profitability of various malls, and the expenses and returns on AEI.
This places a lot of pressure on the Reits managers. They need to constantly weed out less profitable tenants, and they’re compelled to keep rental rates high. Not only does their bonus depend on it, they have shareholders to answer to. Picture how that affects the insides of a mall:
Supermarkets take up too much floor space, and generate fewer dollars per square foot. Boom, your favourite Giant or Cold Storage is closed. Now it’s replaced with a dozen smaller shops, all selling branded crap that costs four times your annual income.
Bookstores don’t make as much money as before. Well we all love literacy, but they can’t cope with the 20 per cent rental rate hike next month. So they’re gone too, replaced with equally short-lived stores. (The new stores will stick around until the next rental rate hike, which is perpetually around the corner.)
Love little fashion boutiques? Well you’d better blow half your pay cheque in there, before a chain like Uniqlo or Desigual comes along and offers way more money for the space.
Retail Reits, you see, are relentless, profit-generating machines. And it’s increasingly common to hear complaints that SMEs are driven out of brick and mortar stores by their rent raising antics. Pretty soon, every mall will be a bland mix of the same giant brands, and Din Tai Fung (which apparently wants to be in every mall on the planet).
Who’s right?
So far, the situation is unclear. On the one hand, Reits may have the expertise and muscle to bring back the crowds, even in the face of declining tourism and economic struggles. On the other, Reits’ insatiable appetite for rental income may be the very cause of malls dying.
At present, all we’re hearing are desultory remarks by the occasional business owner or retail space expert. That’s because there are bigger issues to contend with, such as adapting to the online shopping market. That’s a common enemy that both Reits and brick and mortar stores face.
But as the situation gets worse, ready your popcorn. The accusations and yelling will eventually go into full swing.
