Wednesday, March 21, 2012

Industrial land tender process needs tweaking

Straits Times: Wed, Mar 21
WRITING in his blog last week, National Development Minister Khaw Boon Wan railed against rogue tenants and landlords for operating office and non-industrial activities in industrial buildings.

The minister's warning highlights one thing: a ballooning of demand for industrial space that is clear from the rampant advertisements in newspapers and fliers in the mail.

Indeed, industrial sector prices surged 27 per cent in 2011. Rents have similarly increased 16 per cent last year - to their highest level in 14 years.

While this might be good news for landlords, tenants - and in particular, small and medium enterprises (SMEs) - are bearing the brunt of higher costs. SMEs, the backbone of Singapore's economy, are already seeing their bottom lines and competitiveness eroded by rising rental and labour costs.

This issue is made even more pressing now that Singapore is restructuring its economy in an attempt to lift productivity - a painful adjustment for SMEs.

These firms are already grappling with higher labour costs. Therefore it is imperative to keep rents in check in this time of transition, or the Government risks putting its whole plan in jeopardy.

What then can be done to address the issue, and at which point should the Government step in?

First, we need to examine the factors behind higher industrial rents and prices.

Some, including the SME Committee and MPs, attribute rising rents partly to changes in JTC Corporation's industrial land policy in 2008.

Some of JTC's flatted factories that were meant to offer subsidised rents to SMEs have been divested to real estate investment trusts and private developers. The pressure on private players to offer higher yields to unit holders may have contributed to a sharp increase in rents.

Another analyst points to the number of investors heading for the industrial sector as the residential market cooled.

Industrial land prices spiked, also partly due to some developers that are building 'shoebox factory units' as tiny as 50 sq m to meet investor demand. While they had affordable quantums of less than $500,000, they are unlikely to be large enough for genuine industrial activities.

Throw in the growth of the economy over the years, investors flush with liquidity, the pull of more attractive yields of 4 to 8 per cent in the industrial sector, and unauthorised tenants driving up industrial demand, and the situation comes to a boil.

While increasing the supply of industrial land is the most intuitive way to ease the demand crunch, some industry players say that the problem should be addressed at its root: how industrial land is tendered.

Industrial land is partly supplied through the twice-yearly industrial government land sales (GLS) programme. These are targeted at developers, with the higher bidder typically clinching the site.

In some cases, however, industrial land is sold though a concept price tender system where the winning tenderer is selected based on a double envelope system. Developers are shortlisted based on concept first, with the highest bidder among those shortlisted winning the site.

This gives developers with the deepest pockets an advantage. Steeper land prices, however, will eventually be passed down to local businesses in terms of higher rents.

But rather than simply awarding industrial sites to the highest bidder in most cases such as in the GLS programme, perhaps the Government can consider bringing back a type of concept-price tender system that was phased out early last year and apply it to more industrial sites.

This system specifies a fixed land rent that a developer must pay to the Government for a site. The winner - which will act like a master tenant in some cases - will be chosen based on its design concept and the lowest rental for the end-user. Rather than competing on price, this in effect allows for the most efficient and innovative developer to clinch the land parcel.

Apart from the tender process, however, the authorities should also look at strictly enforcing existing rules to mitigate the demand crunch.

This means being strict on the types of tenants that can occupy industrial space; those operating non-industrial activities such as tuition centres, travel agencies or shops should be told to ship out.

The Council for Estate Agencies (CEA) should also rein in errant agents who might mislead buyers into buying industrial units by marketing them as shopping malls.

Already, certain changes have been made to tackle problems that have surfaced. Industrial land parcels sold this year will be smaller, and with shorter leases to help meet demand from industrialists who prefer to build their own customised facilities...

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Martin Koh/ Sherry Tang
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