Singapore must reinstate rent control legislation if it wants to remain a competitive commercial centre. The rentier dynamics of the landlords that have dominate its property market — exacerbated by the economic shock of Covid-19 — needs to be reined in to make enterprise sustainable in the city-state.

Throughout the 2010s, the competitiveness of Singapore’s enterprise sectors has slipped, as high rental costs mean entrepreneurs and local small & medium enterprises (SMEs) struggle to sustain themselves.

The roots of this problem lie both in the rise of real estate investment trusts (Reits) — which partially drove escalations in industrial and commercial rents — and the divestment by JTC in the mid-2000s of most of its industrial holdings. This is compounded by property developers and investors focusing on generating wealth through passive income, rather than productive work, as well as limited land supply.

A 2015 study, Securitizing Spectacle: Property, Real Estate Investment Trusts, And The Financialization Of Retail Space In Singapore, notes that Reits — a key segment of Singapore’s financial markets — contributed to speculative investing in Singapore property behaviour and created an interdependence between its financial and real estate sectors.

This intensified boom-bust dynamics and heightened financial risk within its urban property market. Essentially, a prolonged recession in Singapore will see an avalanche of distressed property assets and debt creating socioeconomic chaos.

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This is compounded by rentier dynamics and landlords detached from the economic realities faced by their industrial and commercial tenants. Businesses have to divert capital away from salaries and growth activities towards paying rent.

Mr Inderjit Singh, a serial entrepreneur and former People’s Action Party Member of Parliament from 1996 to 2015, observed: “While the government has attempted to increase the public sector’s share of industrial land, progress has been insignificant. In fact, more GLC players are getting properties transferred to them from government-related entities. And with the GLC players converting a significant part of what they own into Reits, things have gotten worse.”

“When I was in parliament, I raised how the approach taken by the government has favoured non-productive investment in properties of all types at the expense of the productive parts of our economy — the business owners. We have foreign investors and funds who are allowed to invest in all types of properties for a return -– a passive income. Even industrial properties are allowed.”

“The poor SMEs or business owners end up paying escalating rents, making their own businesses less viable due to high-cost structures. It is a failure of the government’s policies. We are a small city-state, we shouldn’t allow global investors to be making money from our limited land.”

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Reinstating and updating the Control of Rent Act, repealed in 2001, can help resolve this. Controls on rent increases, eviction controls, and a system of oversight and enforcement by an independent regulator or ombudsman could ameliorate this issue. Singapore’s property market has an oligopolistic structure, rendering it vulnerable to cartel behaviour; rent control ensures the government retains a lever of a finite resource.

Standard economic theory argues against most forms of rent controls. Generally, property owners who cannot raise rents to generate adequate profits given maintenance and investment costs will hesitate to develop new properties or neglect to maintain current properties. This lack of supply growth and ceiling on rent growth can lead to shortfalls.

However, how market forces respond is nuanced. Despite calls by the government for tenants and landlords to forge long-term partnerships, significant inequality of bargaining power exists between landlords and tenants; Singapore is a seller’s market, with limited supply leading to high prices. This has led to continually escalating prices, with indiscriminate rent increases inflating business and consumer costs.

Rent control often seems to be a short-term measure. It drives long-term decreases in affordability and can create negative spillovers in surrounding districts. However, Singapore’s land supply is monopolised by the public sector. Moreover, many industrial and commercial properties are held by government-linked corporations (GLCs) such as CapitaLand, Ascendas-Singbridge and Mapletree.

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Rent regulation for commercial and industrial properties is essential to moderate the market. If left unchecked, landlords’ rentier behaviour will corrode Singapore’s competitiveness, escalate overall living costs and worsen the situation for local entrepreneurs and SMEs.

For example, by capping rent increases at 5 per cent plus inflation, or otherwise setting overall maximum rent levels and limited rental increases for tenants under contract can ensure affordability. It will also limit the ability of landlords to unfairly evict or otherwise pressure their tenants. This can contribute to greater enterprise sustainability by mitigating the high property costs of Singapore.

Noting the current Covid-19 crisis represents an appropriate time for reviewing rent control legislation, Mr Singh argues: “We have no other way left but to make it so that generating rental income for passive investors is unattractive so that prices settle to more realistic levels. With a rent control act, GLCs that own large properties will be forced to relook their charter and stop making money from the poor souls, our SMEs. Why should they benefit so much while we kill the rest of the economy?”