Rental relief

Source : Business Times - 2 Mar 2009

What impact will the fall in office rentals have on the operating costs of your organisation and on your business plans? Does the trend hearten or worry you?

Tan Aye See
Managing Director, Asia Pacific
Savvis Singapore Co Pte Ltd

WHILE reduced operational costs (like lower rent) are always welcomed by companies, a downward rental trend does not necessarily translate into immediate cost savings.

For companies with existing lease agreements in place, it remains unclear whether landlords are willing to renegotiate mid-term.

With the projected 5.5 million square feet of new prime office space due to become available by 2011, and Singapore’s gross domestic product (GDP) projected to contract by 2 per cent to 5 per cent this year, it is hard to see how these units will be filled.

Given the circumstances, it would seem prudent for landlords to take a more collaborative approach with their tenants - ‘investing’ in rental longevity over short-term gains.

Notwithstanding the current economic crisis, Savvis has been growing its presence in Singapore as part of its expansion plans in Asia. We have planned our real estate carefully, reducing our prime office footprint - where we pay much higher rent - and increasing our footprint at our operation base outside of the CBD where rents have typically been a fraction of what landlords were asking in the CBD area.

By taking a strategic approach to real estate costs, as well as maximising partnership synergy between landlords and tenants, companies should be able to benefit from this aspect of the downturn.

Darren Thomson
CEO
Manulife (Singapore) Pte Ltd

IN times of growth and expansion, we aim to build and generate wealth and we take for granted that the costs associated with wealth creation are likely to increase.

Indeed, controlled inflation is a necessary part of any growing mature economy and a positive indicator of a government pressing the right buttons.

It’s a sad fact that much of the recent growth has been overstated and when reality sinks in, we need to get our housekeeping in order.

It is difficult to know whether the price we paid was the correct price. It looks so different now!

In truth, we are all trying to become better housekeepers and put the balance sheet right. That may take some time.

As it stands, any saving is welcome. Jobs and businesses will be saved as a consequence.

We see the current trend as both heartening and worrying at the same time. I may be happy today but we all are part of an extended supply chain and there will be winners and losers; my landlord may be my customer.

The real solution is getting an economy in balance, identifying the right cost for the product or service provided for the new business environment we are creating.

Going forward, slower steadier growth may be the order of the day.

Gwee Seng Kwong
Secretary-General
Singapore Manufacturers’ Federation

ANY help to reduce business cost will be appreciated by our members.

For some, rental forms a large part of their business cost. A drop in rental will help reduce their cost of doing business and increase their capital to invest in the future, for example, for product development.

Nonetheless, many of our members are locked in their lease contracts and they do not expect a significant impact.

On the recent Budget announcement on property tax rebates, over 80 per cent of our members find it useful.

Laura Deal
Executive Director
The American Chamber of Commerce in Singapore

SINGAPORE is an excellent place to do business but operating costs have surged over the past few years, especially office rentals, which is an issue that has been of growing concern to member companies of the American Chamber of Commerce in Singapore. In fact, 74 per cent of our members said they were dissatisfied with office rental costs in 2008.

The drop in office rentals will help companies cope with the impact of the financial crisis. For some companies, especially the small and medium-sized enterprises, the diminution in office rentals might become a key factor to surviving the crisis and cutting costs without having to resort to retrenchments.

The rental situation also means that now, companies have a wider variety of rental options to choose from - especially with the increase in vacant space and the supply of new office space.

While office rentals have decreased compared to last year, some organisations, like ours, will experience a rental increase as their multiple-year leases expire.

Office rentals are still not at the levels they were a few years ago, so even with the price drop, many companies will need to deal with higher costs despite the challenging economic environment.

With that said, there are opportunities in every crisis. We are planning to take advantage of the newly freed space to expand our office so we can meet our members’ needs during the slowdown by organising more low-cost or free events for our members.

Chong Siak Ching
President & CEO
Ascendas Pte Ltd

IN these very difficult conditions, lower rentals will be a welcome relief as they “translate” into lower operating costs for companies.

As a provider of business space, however, it cuts the other way for us. The onus is therefore on us to manage our operating costs more effectively, allowing us to better meet our tenants’ needs and focus on helping them ride out this crisis.

Such times reinforce the importance of strong partnerships between landlords and tenants, something that Ascendas continually strives to build.

Sam Yap S G
Group Executive Chairman
Cherie Hearts Group Int’l Pte Ltd

THE fall in office rentals for commercial property is heartening for Cherie Hearts as this means lower operating costs for our company.

However, the rental situation, as a whole, is far more complex than reported. In fact, I would like to highlight that whether in good times or bad (such as the current recession), residential property owners have been increasing the rental rates for childcare operators. For example, several residential property landlords that Cherie Hearts has been liaising with have asked for more than 50 per cent increase in rental rates this year, contrary to their counterparts in commercial property.

As a childcare operator, we have an implicit commitment towards serving the needs of the residents in our estates, and are hence often not in the best position to negotiate. This puts us in tight financial circumstances.

I am bringing up this issue to highlight the realities that childcare services providers face, and hope that Singaporeans and the government can empathise with our situation.

Often, we are subjected to the forces in our factor markets, and face serious constraints in terms of cost management as many things are not within our control.

On behalf of the Association of Private Childcare Organisation, I appeal to the government to take a second look at our operating circumstances and offer us a helping hand to tide us over this recession, so that we can continue to support the nation by providing quality childcare services.

R Theyvendran
Chairman/Managing Director
Stamford Media

JUST like the banking and financial crisis, the fall in office rentals is also a global concern. The situation is rather inter-related and complex - and thus to some extent, worrying.

Reducing office rentals will have a positive as well as a negative effect on our companies’ operations. As we try to rent out our space to other companies, we will not be able to see the profit we expected earlier. At the same time, reducing rentals may encourage more willing companies to consider this option.

Secondly, reducing rentals will mean that companies would have spare cash from their budget. This could be used for better purposes to generate demand. This could also make Singapore companies more competitive in the global market.

For us, just like any other long-term investor, trust and a business-friendly environment are crucial. Frankly, in our industry, though rentals make up a substantial portion of the operational cost, other plus factors like speed in delivery, efficiency and consistent excellence in the quality of the products are also given much weight before decisions are made.

David Hope
VP and Regional MD, Asia & Japan
Lawson Software

THE current economic downturn and its effect on commercial rents gives landlords the opportunity to reflect not just on their position going forward, but also their practices in the past. Landlords and tenants are effectively working as strategic business partners and each plays a pivotal role in the success or otherwise of the other’s business. However, many landlords have been too aggressive in raising rents to unsustainable levels during the so-called good times - and are now growing increasingly nervous as the blue sky turns grey.

I do not often see landlords taking a truly active role in supporting their tenants to create consistent long-term relationships. Many businesses have been squeezed dry when rental rates rose well beyond reasonable economic levels and as such, these same businesses cannot easily ride out the bad times.

The government has been proactive with rental rebates and incentives, but I believe this is giving some greedy landlords a ‘free hit’, and deflecting the root cause of many problems relating to commercial rents.

The so-called market rate has been for too long driven by landlords raising rents to maximum levels and who are now crying for help. As we are experiencing today, boom and bust economic models do not work.

A more realistic and sustainable business model is one which reflects the needs of both parties. Long-term relationships could be forged with broader business success if rental rates can be managed more reasonably over the longer term. Landlords will then gain loyalty from their tenants and you will see less vacant space as we are seeing now.

As for the agents, I generally do not believe they are adding value or helping the situation. They are an overhead and an added cost that savvy investors avoid by conducting business directly with their tenant.

Gary Harvey
CEO
ipac wealth management Asia

THE current economic downturn has necessitated most businesses riding out the tough times by scrutinising their cost base. After staff costs, rent is probably the next most significant cost to a business.

The 2007 property boom saw a massive escalation of prices that has increased the costs of doing business. The recent projection of falling office rentals will be welcome, as it would positively impact the bottom line of businesses.

However, for most tenants this is unlikely to have an immediate impact as it will not affect existing leases. As such, tenants need to sit down with their landlord and discuss a compromise.

In this area, I believe there is an opportunity for landlords and tenants to work towards a mutually beneficial compromise of lower rentals that will take some of the pressure off businesses operating in today’s challenging times.

Jonathan Yeo
Managing Director
Lexmark International
North East Asia & South Asia

OFFICE rent comprises about 40 per cent of our operating expenses. So if office rents decline, this will certainly help us.

Given the times we are in, we are all looking at every way to cut costs. Most of our customers that I talk to are also looking at reducing their cost. At Lexmark, we help customers reduce their cost in printing, copying and faxing, including supplies and maintenance. To do this, we need to understand occupancy cost as such office equipment does take up space. So we are well aware of occupancy cost in Singapore. A drop in office rentals will certainly help in reducing overall expenses.

We also deal with a lot of small and medium businesses (SMBs) whom we partner to sell our products and solutions. Lower office rents will certainly help them. This, in addition to the government’s recently launched credit and financing scheme for SMBs, will definitely help SMBs. In turn, these SMBs will help multinational companies (MNCs) like Lexmark.

Of course, on the flip side, lower rentals may not be good for landlords; but overall, it is certainly good for the economy.

Teng Yeow Heng Michael
Managing Director
Corporate Turnaround Centre Pte Ltd

THE fall in office rentals will be a relief for our business in the short term. Rental is a major cost component for many businesses in Singapore.

However, in the medium to long term, the cause of the decline in rental is worrisome. This is because companies are moving out or shutting down in Singapore, freeing up office space. It will cause real estate prices to further decline which will aggravate the financial health of the banking system.

It does not bode well for credit and demand. The drop in demand due to the financial crisis results in more business bankruptcies and will cause banks to tighten credit. This in turn will cause further declines in consumption and real estate prices. It is a vicious cycle that will send the economy spiralling into the abyss.

Liu Chunlin
CEO
K&C Protective Technologies Pte Ltd

AS we are not in the business of owning or operating real estate, we definitely welcome falling rentals. This is more so as we have not been locked into a long lease. I’m sure companies renewing their leases at this time will take the opportunity to negotiate better rates and terms and consolidate their facility requirements.

At the same time, we look to some rental stability, even as companies were concerned about the dizzying climb in rentals not too long ago. Most companies just want to get on with their operations as there are other issues to contend with in these turbulent times.

Robert Bailey
President & CEO
Abacus International

ABACUS International has operated in the Singapore market for over 20 years and is in the fortunate position of being able to benefit from the softening in office rental rates during the current cycle.

From a business planning perspective, however, rapid fluctuations in office rental rates either way give cause for concern as they can have a significant impact on operating costs and may influence a company’s expansion plans or precipitate the need for tough choices on where to locate existing or new operations.

This latter issue has implications for the wider economy and the ongoing competitiveness of Singapore as a business centre. It is also not a simple cause and effect relationship as many other adjacent sectors are often affected. For example, lower corporate travel bookings from a depressed property sector have a knock-on effect on the travel industry. Likewise, relocated businesses could have a slightly different impact on volumes and flows of travel.

All businesses these days are looking forward to the restoration of some stability. With the wisdom of hindsight, modest but sustainable growth suddenly seems like a very smart thing regardless of the industry you operate in.

Dora Hoan
Group CEO
Best World International Ltd

THE rapid decline in the global economy and loss of business confidence have accelerated the process of prime office rentals going down. This is cause for cheer for tenant companies looking to cutting business costs. Businesses will be under severe pressure to contain and indeed reduce expenditures.

However, many tenants facing rent renewals this year under leases signed some three to four years ago will still be burdened with high rental increases. In view of the sharp decline recently, there has to be some fair negotiation towards a win-win situation for both occupants and property owners.

Sherman Tan
Chairman
AsiaSoft Corporation Co Ltd

THE fall in office rentals will certainly have an impact on the operating costs of most organisations, including Asiasoft as we have been affected by rising office rents in recent months. Companies now find it possible to expand their operations or relocate to a more centralised area in Singapore.

The Resilience Package introduced by the Singapore government also helps to make the market more attractive, drawing overseas businesses to invest. This fall is not so much a trend but a healthy price moderation and we’re positive that it will be good for the overall business climate.

Charles Reed
CEO
DOCOMO interTouch

TENANTS and investors will certainly stand to gain from the fall in office rentals, which have been sky-rocketing for quite some time. High rents have seen some companies having to cut operating costs in other areas or move out of prime districts altogether.

There is also anecdotal evidence that rents are still higher than the current leases that may have been signed a number of years ago.

Due to tightening overheads, companies are still moving out or acquiring smaller premises even though prices have fallen. It does not bode well for the property market.

For DOCOMO interTouch, falling rentals is indeed good news for our two offices and global headquarters in Singapore. However, our focus has always been on increasing our margins over the long term.

The key is to focus on what you can control and not be overly stressed by what you cannot.

Lim Soon Hock
Managing Director
PLAN-B ICAG Pte Ltd

ANY form of cost savings is always welcomed by businesses. This is especially so, given today’s difficult operating environment.

Rent is often a big component of costs after wages and salaries. A decline in office rentals will have a positive impact on the operating costs of organisations and business plans.

That said, companies need to be aware that the savings derived must be able to help cover any shortfall in gross margins arising from declining sales from the poor economic conditions, if it is to have any real impact.

It is important to manage costs both in good and bad times. It is a discipline that will ensure that the company not only continues to grow and develop, but also continues to thrive.

Regardless of the economic climate, astute cost management is a powerful and strategic weapon which a company can use to fight the competition and lead in its industry.

Businesses should worry about generating positive cash flow. To the extent that lower rentals will contribute to this, it is a welcome trend.

That said, it is always easy for businesses to cut the extra dollar but more difficult to generate the additional dollar of revenue, so companies should give this the priority it deserves in today’s trying times.

Tan Kok Leong
Principal
TKL Consulting

THERE are obvious benefits for firms with leases expiring if office rentals plunge by 30-40 per cent this year and 20-25 per cent in 2010. The savings from reduction in cost due to a fall in office rental would certainly ease the pressure to cut staff or close outlets.

For businesses in debt or facing financing problems, it would prolong their viability. The economy would also maintain its competitiveness, even in hard times. One probably could also expect a faster office rental recovery from 2012 onwards when the global economy finally improves.