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Is regulating rents in Singapore, the answer to rising rentals? 

By Yap Shiwen

The recent spate of restaurant closures and the loss of hawker heritage has had Singaporeans blaming high business business costs and indiscriminate rent increases as the root of the problem. However these are symptoms of a larger and more complex trend, highlighted by MP Inderjit Singh in his Budget 2014 speech.

Part of this loss of competitiveness is due to high rental costs for businesses and that can be boiled down to two one key reason and that is, government land divestment policy. JTC was a landlord for 18% of the industrial property some 10 years ago but today manage only 3% of the market. This is a huge shift and the government lost the ability to influence rental prices resulting in developers and investors making the money - this is passive income and not productive income benefitting the investors, including foreigners, who can afford to invest in industrial and commercial properties as an investment tool and not as a productive activity.

In return, the smaller companies find they cannot manage the high rental costs and look for other means to cut cost, which inevitability leads to the squeezing of salaries of workers. This has led to the problem of Singaporeans unable to afford the high cost of living and therefore having to have the government step in year after year with transfers to help Singaporeans cope. Let me quote one employer who made this comment: “I would be much happier being generous in salaries to Singaporean staff than supporting the high rentals.”

The long-term solution may be in rent regulation for commercial and residential properties, to moderate market behaviour and manage price hikes. There is an urgent need to regulate rising rentals, which escalate living costs and negatively impact local businesses and consumers.

 

What is Rent Regulation?

Rent regulation or rent control are laws administered by a public authority limiting changes to prices for renting residential or other real property. The objective is to limit prices that would result from an open market, where a seller's market occurs alongside a limited land supply, as in Hong Kong and Singapore.

The inequality of bargaining power between landlords and tenants in a seller's market produces continually escalating prices. Indiscriminate rent increases inflate business and consumer costs, resulting in escalating living costs and potentially in socioeconomic instability.

Rent regulation is frequently observed in residential housing, functioning as a price ceiling for the market. Rent regulation exists in approximately 40 countries worldwide, with laws varying across borders. Singapore had the Control of Rent Act, which was repealed in 2001.

Intended to protect tenants in privately-owned residential properties from excessive rent increases, it mandates gradual rent increases and ensures landlords receive a return-on-investment deemed fair and equitable by regulators. It is designed to promote economic stability by slowing property displacement during economic boom cycles.

 

Roots of Rising Rents

The escalation of industrial and commercial rents has been attributed partially to Real Estate Investment Trusts (REITs). 10 years ago, JTC divested most industrial holdings, intending to open the market to a private sector more responsive to industry needs. MP Inderjit Singh referred to this as a miscalculation, noting that:

"The government lost the ability to influence rental prices resulting in developers and investors (including REITs) making the money - this is passive income and not productive income benefiting the investors."

Seng Wun Song, a CIMB economist, noted the economic roots of the issue, stating that "...if you take a few steps back, it is because there is plenty of demand for space out there. Economics 101: this allows landlords to yank up rentals."

The problem is not only rooted in limited land supply. With limited supply, sellers - because of supply scarcity - can obtain better conditions for sales. The oligopolistic market structure, natural seller's market created by land scarcity and property divestment by the government and government-linked entities has not been beneficial for affordable property in Singapore. Neither is the view of HDB flats as assets.

Public bodies like the HDB lease out property to Sheng Siong. REITs that have bought into property operate on the Wealth Maximisation Model, aiming to maximise returns on investments by shareholders. This drives behaviours that can have costs and benefits, but ultimately result in price hikes.

 

Rent Control in Hong Kong

The Singapore and Hong Kong property markets make for good comparison. Both are oligopolies and seller's markets, with limited land in supply and culturally dominated by Chinese. The British colonial government regulated rents on shops and residential units from the 1920s to the 1940's, when the arrival of large numbers of mainland Chinese migrants prompted landlords to raise home prices and rents after the World Wars.

They were temporarily applied between 1921-26,  after World War 1 and again after World War II,  with the Tenancy Tribunal established in 1945 and operating till 1982. Rent controls were renewed in 1973, to halt increases exceeding 90%  of prevailing market rates or hikes above 30%, for two years. Owners also had to renew rental contracts if tenants were willing to pay prevailing market rates. However, tenancy control was halted in 1998 after the Asian financial crisis of 1997.

The history of Hong Kong suggests rent control helped maintain social stability and neither hindered economic progress nor hurt the interests of small property owners. The use of rent regulation of commercial and residential landlords prevented indiscriminate behaviour and moderated the market.

 

The Best Response?

Irvin Seah,Vice-President for Economic and Currency Research at DBS Bank, commented on the Singapore property market that:

"Right now, what we have is an oligolopolistic structure, with a small group of players in this market, which makes it prone to price rigging. It is not so much about bringing prices down, but about ensuring that we have a lever on certain scarce resources (i.e. land). The REIT model may work in big countries with ample land but less so for land-scarce Singapore."

Reinstating the Control of Rent Act may bring a measure of stability to the market, especially if extended to industrial and commercial properties. Alternatively, rent stabilisation, as in New York City, with limits on rent increases, can defuse public protest and restrain market excesses.

While Iskandar provides some relief, it is vulnerable to policy reversals from the Malaysian government at their political convenience (i.e. CLOB saga). This is due to the cyclical nature of Singapore-Malaysia diplomatic relations.

A longer-term solution lies in developing subterranean infrastructure, such as the Singapore Underground Science City, or in developing Singapore as a seasteading hub, with seasteads acting to expand available property for use. This is more distinctly possible and has the benefit of further developing the industrial base and diversifying Singapore's economic portfolio.

A policy response needs to be calibrated, adaptable and robust in the long-term. Because rent regulation, as implemented in other countries, has often had negative long-run effects when enforced for longer than necessary.

Given the context of Singapore's property market, there is a strong need to use rent regulation as a tool applied at relevant and specific cycles of a property market. Apparently, 2014 is a good time to start.

 

Resources & Further Reading

Block, W. (2008). Rent Control. The Concise Encyclopedia of Economics. Library of Economics and Liberty. (Online link)

Block, W. (2002). A Critique of the Legal and Philosophical Case for Rent Control. Journal of Business Ethics, 40: 75–90. (Online link)

Bowman, S. (2012). Only bombing would be worse than rent control. Adam Smith Institute Blog. (Online link)

Chi, Y. (2013). Rent control necessary. China Daily. (Online link)

Cruz, P.C. (2009). The pros and cons of rent control. Global Property Guide Investment Analysis. (Online link)

Shilling, J.D. & Tien, F.S. (2006). Why is real estate market an oligopoly? NUS Department of Real Estate Lecture. (Online link)