Economic Affairs

Is Singapore at risk of becoming a rentier society?

In this time of economic transition, there is a need to guard against a tilt towards moneymaking from investments at the expense of productive work.

A widely held view is that Singaporeans have a fixation with property, be it on an individual level or at a corporate level. Despite various property cooling measures, a condo launch in a good location - not priced cheaply, but affordably - can yield a respectable response. Several tycoons have made it big through the rise of property assets, whether through Far East Organization, CDL and Hong Leong or even OCBC Bank. Several Temasek-linked companies have also performed well from property, including CapitaLand, Keppel Corp and Mapletree.

Yet another prevailing view is that high rents are killing the fledgling entrepreneur or the regular small and medium-sized enterprise. This goes hand in hand with the view that the local retail industry is in the doldrums because only large cookie-cutter chains can afford the rents that the top malls charge while shops full of character are squeezed out.

Fact or fiction, myth or reality, these views may be one reason why a recent commentary by Professor Tommy Koh in this newspaper on the Singapore economy's structural issues resonated with many readers. He touched on the high costs in Singapore and said some friends had decided to close their businesses because of escalating rentals. One friend even warned that Singapore was in danger of becoming a rentier society, he said.

Just what is a rentier society, and what are the risks to Singapore if it becomes one?


In economics, a ''rent'' is money you make because you control something scarce and desirable, whether it's an oilfield or a monopolistic position in a market. There is a bit of ''rent'' in nearly every transaction, the US economics journalist Adam Davidson once explained in a New York Times article.


"When you pay rent on an apartment, some of the money is for the value the landlord has added to the property, say, by upgrading the kitchen. But much of the money your landlord makes comes from the fact that he or she controls property in a desirable location," he wrote.

The term rentier is used to refer to someone who lives off savings or inherited wealth, rather than through productive work. Every society has its share of rentier activity, with people and companies making money off investments.

Indeed, speaking at a Singapore Institute of International Affairs event in late 2014, Mr David Pilling, then Asia editor for The Financial Times, said that going forward, he expected Singapore to put more focus on investment through companies like Temasek Holdings.

"To some extent, I think part of the Singapore economy will become what you might call a 'rentier economy'. Singapore is very wealthy, it has a lot of savings, it also has a lot of know-how. So one of the ways Singapore can make money is by placing bets on other companies, other countries, other technologies. Just like how a big pharmaceutical company, for example, has all its R&D in-house and it takes stakes in and might even buy technology companies," he said.

"This is a process of hedging, it is a processing of turning savings into a stream of income. This is already a part of what Singapore does and it would be my guess that they will continue to do it and it will become more important," he added.

So what then was Prof Koh warning against when he used the phrase "rentier society" and why did it resonate with many? A plausible explanation is that Prof Koh and many other Singaporeans are worried that a disproportionate share of the fruits of economic growth accrue to rentier individuals or companies, at the expense of people and small businesses doing productive work.


A couple of years ago, the Ministry of Trade and Industry presented a paper on the link between Reits and high rents. What it found was that rents were generally higher at Reit malls than single-owner malls and that rents had indeed risen faster at these malls. But the academics found that this was due to the characteristics of the mall - better location, for example - and the rise in rents was not per se caused by the Reit's acquisition.

It would be foolhardy for a Reit to kill the goose that lays the golden eggs. As the economy slows, rents will have to reflect the reality on the ground. A check showed that CapitaLand Mall Trust's (CMT's) rental reversion for the first nine months of last year was 1.3 per cent. CMT counts Junction 8, Bugis Junction and Tampines Mall among its portfolio properties. Rental reversion refers to the change in current rental rates compared with the rates inked previously. At 1.3 per cent, this means that rents increased by about 0.4 per cent per year for a typical three-year lease, a figure that hardly resembles a galloping increase.

Reit managers would also resent the accusation that they just sit back and collect rents. With so many malls having sprung up, they have to invest to enhance the mall, to keep themselves in the game.

CMT's IMM Building in Jurong, for example, offers a centralised dishwashing service so that tenants do not have to bother about hiring their own dishwashing staff. CMT has also introduced better security technology at some of its malls that maintains the level of security but reduces the number of security guards needed.

Industrial rents are on a downward trend. A report by property consultancy Savills on the third quarter of last year saw average prime monthly rent for the factory and warehouse sector slipping 6.3 per cent from the second to third quarter to $1.50 psf.

Sale values also declined. Savills said prices for upper-storey factory and warehouse units on 60-year leases fell about 4.7 per cent from the second to the third quarter while values for similar units with 30-year leases fell 2.1 per cent over the same period.

Still, since Singapore is a global city, rents and property values are high. Singapore comes in at No. 4 in prime logistic rents in a report by property consultancy CBRE last year, although growth has slowed somewhat. In terms of prime occupancy costs, Singapore was ranked No. 20 in another CBRE report.

It may be true to say that business rents are not skyrocketing. But they remain a bugbear among SMEs.

The latest annual survey by the Singapore Business Federation (SBF) found that 68 per cent of respondents cited operation costs (excluding labour costs) as the biggest challenge of operating in Singapore, while 66 per cent cited manpower issues and 55 per cent said it was business competition.

SBF CEO Ho Meng Kit said: "In the midst of the tepid economic climate, rent continues to be an issue for local companies as it forms a large part of operation costs (excluding labour costs) of most traditional offline businesses."


Property looms large over the economy and Singapore psyche.

Many investors have preferred to put their money in something tangible because they believe property can be a store of value. Investors have long memories of racking up losses when the stock markets tanked.

So far, the property market has delivered on many occasions, for both individual investors and Singapore businesses. A person who bought a property in 1990 is undoubtedly sitting on a large gain, even though it may be smaller than at the market's peak.

As the Singapore and Asean economies mature, a certain level of wealth has been attained. The growth of private banks and wealth management outfits testify to an increasing number of second- and third-generation wealthy individuals who will be hoping to preserve and grow their wealth.

The story of Singapore and rent-seeking behaviour has certainly become more nuanced.

An early precursor was the Asian financial crisis, when companies and individuals lost money, which gave the first inkling that property might not be a safe bet.

Fire sales may still be few and far between, but it is more common now to see prime luxury properties selling at up to 20 per cent off their previous asking price (or even their previous transacted price).

However, it is not that many people still aspire to be landlords today. And even if they do, most realise that they need to go into it with their eyes open, to choose properties in a desirable location and maintain them well. Tenants have to be courted to sign the lease and incentives have to be thrown in to get them to renew.

While previously many professionals became property agents, their numbers have now shrunk.

Rent-seeking behaviour does not refer only to property owners. It can also refer to assets such as stocks and shares. As the financial service sector grew in London, for example, it came in for criticism for adding little productive growth to the economy compared to manufacturing, which shrank.

And certainly the involvement of the public sector has curbed any excesses of rent-seeking behaviour, according to Professor Sarah Cheah from the National University of Singapore (NUS) Business School. She points to how the Government can achieve a more purposeful way of organising economic activities to promote more productive use of resources.

A good example is the development of a 200ha zone to create One North to host clusters of world-class research facilities, innovation agencies, start-ups, SMEs and multinational companies. Through these clusters, public and private organisations can operate in a more synergistic and cost-effective manner to promote innovative activities.

However, Prof Cheah notes that innovation can also happen in unfavourable circumstances. High rents, for example, could lead to a development of new business models such as e-commerce.

Singapore has prospered from the growth of the economy and the corresponding growth of its property market. Many have seen the value of their HDB homes rise, and a few have reaped the windfall from en-bloc exercises. Others have seen the value of their office buildings soar.

As the Singapore economy seeks out new paths to grow, it is timely to have a debate on whether the focus on various resources is appropriate and whether they are being put to the best use.

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A version of this article appeared in the print edition of The Straits Times on January 11, 2017, with the headline Is Singapore at risk of becoming a rentier society?. Subscribe