Key Elements of Government’s Land Dividend Extraction Strategy

Today, properties for the whole value chain are controlled by only a few institutional landlords (REITs). The impact of high rentals is therefore felt across the entire economy. Singapore has evolved into a rent-seeking economy over the last 2 decades to benefit landlords, particularly REITs, disproportionately. The rise of institutional landlords with unrestrained pricing power therefore cannot be a good thing for the city-state’s long term socioeconomic development. The high business costs have rendered our SMEs uncompetitive externally and made our overall economy less nimble and vibrant. Our efforts to restructure our economy since the turn of the century have basically stalled. We have the National Wage Council (NWC) to recommend and put a lid on increases in wages but we have no similar government agency to control increases in rents. As a result, while wages for workers are systematically depressed, the setting of rents by the REITs has been liberalized.

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11 September 2019

To summarize, Government’s strategy to extract the growing land dividend is to not only push up the market values of land but also maximize rental yield from retail, commercial, and industrial properties through REITs.

 

Pushing up the Market Value of Land

 

To begin with, the Government is not only the policymaker but also the sole supplier and biggest developer of land. The State owns an estimated 90% of the 710 sq. km. of land the small city state has. To control land use, the Government adopts a dual approach of conducting land sale through open tender and of direct allocation based on needs of strategic projects. The agencies regulating land use are the Singapore Land Authority (SLA) and the Urban Redevelopment Authority (URA).

 

For example, HDB and JTC buy state land at ‘market rates’ from the SLA to develop housing estates and industrial parks. URA, on the other hand, serves as the state’s agent to sell land for private use through public tender under the Sale of Sites programme, launched in 1967.

 

The Government maintains that, because state land forms part of Singapore’s national reserves, it is critical that land is sold at a 'fair value'. The values of land ‘allocated’ to HDB, for example, are determined based on recent prices of resale flats. As for land sold through open tender for private use, a 'reserve price' is established for each site by the Chief Valuer, an officer at the Inland Revenue Authority of Singapore, based on recent transactions. The site is awarded as long as the bid does not fall below 85% of this figure.

 

Critics point out that, by awarding land to the highest bidder, and refusing to sell when developers' bids fall below the reserve price, land prices are pushed up. Similarly, by using resale flat prices to derive a value for land set aside for new housing estates, the Government causes land cost, and hence also the BTO prices for new flats, to go up. Moreover, as the sole supplier of land, the State can also control prices by 'opening or closing the valve' in the land pipeline. Finally, the value of any given land parcel is also affected by factors such as development charges, plot ratio and zoning, all of which are decided by SLA and URA.

 

It is thus not surprising the Government bears the brunt of criticisms for the rapidly rising land costs. In fact, complaints of high land costs for both public and private housing and for industrial use were already emerging in early 2000s.[1]  

 

Maximize Rental Yields through REITs

Beside complains about land costs, there have also been mounting concerns over high rentals for retail, commercial and industrial properties particularly after the debut of REITs in early 2002. Notably, the REIT industry has grown by leaps and bounds since then.

 

The sterling performance of Singapore’s REITs was no doubt facilitated by the consistency of the industry’s high dividend payouts, liquid secondary market, low transaction costs and low leverage. These benefits helped to attract investors seeking not only higher yield but also safety associated with transparent, predictable markets with sustainable income profiles.

 

Still, given Government’s domineering role in a tightly regulated Singapore, the impressive growth of the REITs could not have been possible without the blessings and active policy support from the Government.

 

In fact, since the turn of the century, the Government has been actively promoting the growth of the industry with the objective of positioning Singapore as a global centre for REITs. As of July 2019, there are 40 REITs listed with the SGX. Of these, only 23 are S-REITs owning Singapore assets spreading across, retail, commercial, industrial, warehousing & logistics, hospitality, and healthcare sectors. (See table below. Note that some of these REITs own also overseas assets.) 

Table S-REITs Listing.jpg

Take the retail sector for example. All the major malls in Singapore are owned by a few REITs. CapitaLand Mall Trust (CMT) alone accounts for almost half the number of the malls.

Table REITs Retail Listing .jpg

Note: The figure in bracket indicates the number of properties owned by the respective REITs.

Sources: Figures are collated based on information available at the respective websites accessed in early September 2019.

 

REITs Owning Properties Across the Whole Value Chain

 

In fact, a closer look reveals that properties for the whole value chain (i.e. from storing of raw materials to production, to storing and distribution of finished goods, and finally to retail sales) are controlled by only a few institutional landlords (REITs).

The table below shows the portfolio of assets (number of buildings) owned by retail, commercial, industrial and logistics REITs. Malls are dominated by CMT; industrial properties by Mapletree, Ascendas and ESR; and warehousing and logistics by Mapletree, Cache and Ascendas.

Tables REITs Assets in Sectors.jpg

Note:

REITs shaded blue are owned by CapitaLand Group. REITs shaded pink are owned by Mapletree Group. The figure in each cell indicates the number of a specific type of properties owned by the respective REITs

*Ascendas REIT manages a total of 78 properties (comprising 5 Business and Science Park, 3 Integrated Development Amenities & Retail,  22 Hi-Specd Industrial, 27 Light Industrial,  and 21 Logistics)

+ ESR-REIT manages a total of 57 properties (comprising 3 business parks, 7 high-specs industrial buildings, 36 general industrial buildings, and 11 warehouses/logistics hubs)

^ AIMS AMP Capital Industrial REIT manages a total of 25 properties (comprising 1 business park, 5 light industrial buildings, 1 hi-tech building, 8 general industrial buildings, and 10 warehouses/logistics hubs)

> OUE Commercial REIT: 3 of the properties are integrated developments combining commercial and retail activities.

# Soilbuild Business Space REIT manages a total of 4 properties (comprising of 2 business parks and 2 industrial builds)

@Sabana Shari’ah Compliant Industrial REIT manages a total of 18 properties (comprising of 6 hi-tech buildings, 4 general industrial buildings, 2 chemical storage facilities, and 6 warehouses/logistics hubs)

Sources: Figures are collated based on information available at the respective websites accessed in early September 2019.

 

The concentration of ownership gives these few REITs excessive pricing power. Moreover, because REITs control properties at every link of the value chain, the impact of high rentals is felt across the entire economy.

 

To put simply, Singapore has evolved into a rent-seeking economy over the last 2 decades to benefit landlords, particularly REITs, disproportionately. The rise of institutional landlords with unrestrained pricing power therefore cannot be a good thing for the city-state’s long term socioeconomic development. The high business costs have rendered our SMEs uncompetitive externally and made our overall economy less nimble and vibrant. Our efforts to restructure our economy since the turn of the century have basically stalled.

 

The concentration of ownership and the excessive pricing powers of the REITs also bring to fore the question of whether REITs are monopolies exhibiting inequitable competitive behaviours.

Whose Job to Keep REITs in Check?

 

The agency tasked to ensure fair competition is the Competition Commission of Singapore (CCS) which was established only in 2005. Its job is to look into the industry structure, government regulations and commercial practices to prevent concentration of market power that may hamper or distort competition. In 2013, despite feedback from the business community over sharp increases in industrial property prices and rentals due to the growing presence of REITs as well as private property players’ acquisitions of industrial properties that were previously owned by JTC, CCS ruled that rents and prices of industrial properties in Singapore had not been “moving out of tandem, and that there was no evidence of abnormal rent or price increases arising from anti-competitive practices”. At the same time, CCS also did not find any single player, or group of players collectively dominating the industrial property market. Neither did it find that the acquisitions of JTC assets by private players resulted in a substantial lessening of competition in the industrial property market in Singapore.[1]

 

We have the National Wage Council (NWC) to recommend and put a lid on increases in wages which, to begin with, have already been depressed by the influx of low-cost foreign workers. But we have no similar government agency to control increases in rents. As a result, while wages for workers are systematically depressed with the influx of foreign workers, the setting of rents by the REITs has been liberalized.

 

Typically, it is the job of the governments to curtail rent-seeking activities. In the US, for example, antitrust legislations have been put in place since the Progressive Era (from 1890s to 1920s) when big wigs like John Rockefeller, JP Morgan and Andrew Carnegie, collectively known as the “robber barons”, dominated the industries and pursued unethical and unfair business practices aimed at eliminating competition and extracting extraordinary profits. These legislations are still actively in force today. As of June 2019, the US justice Department was still conducting inquiry into the anti-competitive market behaviours of Amazon, Apple, Google and Facebook.

 

The problem in the case of Singapore is that there are REITs either partly owned by Temasek or are government-linked companies (GLCs) such Keppel Land and SPH. Temasek, for example, owns 40.37% of the CapitaLand Group as of end of 2018. The Government therefore has a vested interest as not only the policymakers and regulators but also capital owners (through the sovereign funds) and business owners (through the GLCs and their webs of subsidiaries).

 

After six decades of uninterrupted rule with hardly any opposition, the ruling party now has extensive vested interest entrenched in many areas of the Singapore’s economy.

 

This begets the question that if the rent-seeker is the Government, who then is to keep the Government in check?

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REFERENCES

[1] See Lydia Lim. (2002). “Is land pricing the cause of rising costs?” Straits Times. 30 March, 2002.

[2] See  Competitive Edge (2013). “How Competitive is Singapore Industrial Property Market?” Competition Commission of Singapore. Issue 05, 1st Quarter, 2013.