Of land costs and productivity

This week, two major employer groups raised the alarm about the labour woes faced by Singapore businesses.

The Singapore Business Federation said companies in certain industries found it particularly tough to hire locals - notably in the food and beverage, construction and service sectors - and that foreign worker rules needed to be fine-tuned and tailored to specific industries.

The Singapore International Chamber of Commerce warned that the difficulties in hiring locals coupled with the strict constraints on hiring foreigners for service jobs or skilled staff for specialist positions might well mean that multinational corporations have to rethink and resize their operations here.

Their problems arose from the Government's recent tightening of work pass rules and raising of levies to manage the size of the foreign workforce in this country. The authorities have announced that they now want to keep the foreign workforce to about one-third of the total as our physical infrastructure has strained at the seams in recent years. As such, the continued heavy reliance on imported foreign labour is not sustainable in the long run. 

At the same time, the authorities have been structuring programmes and encouraging employers to explore various ways and means to raise productivity levels.

However, if you speak to employers, they will tell you that foreign workers are necessary to keep costs down, raise productivity levels and keep Singapore competitive. You can automate in some industries or streamline work processes to enhance work efficiency but only up to a point. Beyond this, it takes a lot more effort to achieve that incremental increase in productivity.

The problem is complex, but I suspect this issue about our labour problems is one that neither employers nor the authorities can win by only raising productivity or right-sizing foreign worker inflows.

What, you may ask, has all of this to do with property?

Because, as all employers know, labour is not the only major cost faced by businesses. Rental costs are the other major expense.

Some years back, an American food and beverage firm asked a potential local partner about the rental costs for setting up a shop in Singapore. When told about the monthly rental the local firm was paying at a certain shopping centre, the American company asked if the amount was for a whole year.

To give you another example: Four years ago, our firm's office lease was up for renewal. The asking rate was almost double the previous amount.

What do you think that would have done to our productivity levels if we have committed to the new lease at that asking rate? All our efforts to streamline our work processes and improve staff productivity over the past years would have been completely negated.

I remember a speaker at a seminar some time back saying that Singapore's retail market had a lot of room to expand further. She said Singapore's retail space per capita was only about half that of Hong Kong. You have to ask why. Have our land costs risen too quickly such that demand from retail developers has been constrained?

But if you ask the retailers, there is still a lot of demand - but not at the current asking rentals. There are also a lot of potential entrepreneurs whose businesses cannot even get past the planning stage because of the lack of affordable space in our commercial market.

Land costs are significant in Singapore, and you could say there is a good correlation between rentals and land costs. If the land cost is high, everything else remaining constant, the asking rentals will have to be sufficiently high to eventually cover this cost.

In Singapore, the dominant supplier of land is the Government. As such, to a large extent, it determines the market price of land by the rate it releases sites to the market.

If it tightens supply, the price of land shoots up. If it increases the pace of land release, the price moderates.

With it being in such a dominant position, there are no true market guides as to the right amount to release. I turned to an academic for an answer. She only replied that it should be at a rate that is sustainable.

In any case, an out-of-the-box approach should be taken to solving our labour problems. I strongly suspect that, if it were just a matter of automation or improving work processes, we would have solved our labour problems by now. 

Source: Today - Oct 28, 2011

by Colin Tan is head of research and consultancy at Chesterton Suntec International.