Saturday, January 17, 2009

Squeezed between high rent and poor sales

A HOME-GROWN brand of women’s clothes has decided to operate in Malaysia - and only Malaysia. Coral Isle, in The Centrepoint, will shut for good next week, before its three-year lease expires on Jan 28.

Slow custom is putting the brakes on owner Poonam Bhandari’s ambitions in Singapore.

The $20 per square foot (psf) rent, or $18,000, she pays every month in The Centrepoint is too much to bear. Amounting to 90 per cent of her operating cost, it was ‘killing’.

She had hoped for a reprieve when her lease was up. But negotiations with landlord Frasers Centrepoint came to nothing. They told her there would be no rent cut, she said, and that there was ‘no room for negotiation’.

Frasers Centrepoint confirmed that they had a request from the owner of Coral Isle about rent but would not go into details.

They said, however, that they had offered Mrs Poonam assistance, in in-store promotions, to help her sales figures.

For Mrs Poonam and many other small businessmen like her, it is too little too late.

Of 45 small and medium-sized retailers and restaurant owners The Straits Times spoke to, five had wound up their businesses in the past six months, four had shut at least one branch, while another seven will close shop entirely when their leases expire this year.

One of them is Ms Amelia Pang, 39, who started Coziz Studio in International Plaza selling clothes imported from Hong Kong four years ago. Rent was then $1,491 a month. She poured in about $40,000 as start-up costs and running capital into her first business foray.

In 2004, turnover could be $10,000 a month. Last June, the landlord, the management of International Plaza, wanted to increase her rent to $2,200. She managed to stay it till October at $2,000.

But business is so bad that she has decided to call it a day. She barely makes enough to cover the rent. ‘Sometimes we have no customers at all,’ she lamented.

Whether in prime Orchard Road or a suburban mall, small businesses are feeling squeezed by falling receipts on one hand, and non-negotiable rents on the other.

Eleven tenants who renewed leases last year report at least a 10 per cent increase in rent.

Asked for specifics, CapitalMall Trust, which has 14 properties, said rents have gone up 4 per cent annually while YTL Pacific Star Management, which has stakes in malls like Wisma Atria, said renewals last year were 5 per cent above past contracts.

Different outlets, however, pay different rents. And tenants could be suffering or thanking their lucky stars depending on whether they signed the lease in a good year or bad, said Singapore Polytechnic retail management lecturer Sarah Lim.

The hardest hit are those who renewed or signed leases in 2007 or early last year, when rents were soaring, she added.

The Singapore Retailers Association, which has been trading words with landlords in recent months, reckons that rents have jumped by as much as 80 per cent in prime areas and 30 per cent in popular heartland spots.

Even those who lease space from the Housing Board are feeling the heat.

At Loyang Point in Pasir Ris, Mr Jeffrey Kam, 43, who owns shoe shop Rayna Collection, had his lease renewed early last year at $4,000 a month, a 12.5 per cent increase.

Six months later, he was losing $1,000 a month because of poor business. His landlord is the Housing Board.

In an e-mail reply, HDB said that new tenants bid for rents, for a fixed-term tenancy of three years.

At the end of that term, rent renewals are reviewed by valuers appointed by the board.

Mr Kam said he had to assume the last tenant’s rent when he took over the shop eight years ago. It was a mistake to renew his lease, he said. ‘This is a dead end. We will close down when the lease ends.’

No one anticipated how last year would end. Many thought the good times had yet to come, especially with plans to attract more tourists here. The last time retailers felt the pinch was in 2003 when Sars scared away both locals and tourists from shops.

But with the situation set to worsen, can retailers hope for some relief from landlords?

Mr Turner Canning of real estate consultants Cushman and Wakefield said rent levels depend on benchmark properties in the area, demand and supply, as well as a landlord’s profit margins.

Taking this into consideration, the average super-prime Orchard Road rent now hovers around $54 psf per month, higher than the $51.70 psf a year ago.

Two of the five major landlords The Straits Times spoke to said that they might give out rental rebates on a case-by-case basis.

But they said that such rent adjustments were rare, and preferred to find other ways to help tenants, like increasing traffic.

The five - CapitalMall Trust, AsiaMalls, Far East Organisation, Lend Lease and Frasers Centrepoint - peg rents to factors like floor level, rents in comparable malls and gross turnover.
According to AsiaMalls’ general manager Stephanie Ho, rental adjustments have to be pre-negotiated and agreed on.

The HDB, which is landlord of HDB shops as well as 25 neighbourhood centres, said that to assist tenants, it has offered them the option of paying their rent in instalments. Tenants can also sublet up to 50 per cent of the premises, subject to HDB’s approval.

In terms of rental renewal, it said tenants can get a second opinion from an independent private valuer to assess fair market rent. Tenants can also put the unit for re-tender.

Like the landlords of major malls, HDB also carries out upgrading to ‘enhance…attractiveness and inject more vibrancy’ to shops and complexes.

Retail management lecturer Sarah Lim said smaller landlords might give more leeway on rent.

This seems to be the case for landlords like the Goldkist group, which owns 40 units in the multi-owner Sim Lim Complex. Its director H. D. Gupta said tenants have been given up to a two week rent-free period, case-by-case and based on market conditions.

In 2007, when it had feedback from tenants that the computer industry was flagging, Goldkist absorbed increases in property tax even though rental contracts allowed it to pass them on.

The company, which has been in property rental for about four years, has increased tenants’ rents by 5 to 10 per cent.

Mr Gupta said that a combination of maintenance fees, property tax and interest on bank loans are limitations on rent reductions. ‘For any property owner, we are paying banks in instalments. Interest normally increases every year. All these costs have not gone down,’ he said.

If landlords have obligations, so do tenants. They are typically locked into leases for one to three years. Some contracts do not include exit or subletting clauses.

Even if they did, shopping around for a cheaper place might not work out.

Said Association of Small and Medium Enterprises president Lawrence Leow: ‘A change of location may mean death for a business, especially if their contact base has been built up over the years. The lesser of the two evils is to continue.’

That was what happened in the case of retail brand Leather Ark. When rent at its Parkway Parade outlet jumped 30 per cent to $7,000 a month and business at her other outlet stayed slow, owner Jean Yeo considered, but decided against moving out.

‘We thought of moving, but dismissed it because of high fixed costs, and what about our regular customers who live nearby?’

Instead, the 49-year-old held back plans to open a third outlet at Tampines, and increased the prices at her shop by about $1 per item. She also decided to close her other outlet once the lease runs out in January 2010.

Tenants are doing all they can to stay afloat, like laying off staff and cutting prices to induce sales.
Mr Richard Suen, who owns a jewellery store at Central, now lets customers do the unthinkable - bargain.

‘We still have a year left on our lease, and we just want to keep our heads above water,’ said the 56-year-old. ‘We cannot close shop and run away, can we?’

What tenants want
WANTED: Help for restaurants and retailers.
Hit by a double whammy of declining sales and rising costs, businesses are looking to the Government to ease their burden.

The Association of Small and Medium Enterprises (Asme) and Singapore Retailers Association (SRA) have met ministries in the past two months to ask for help with their cost of operations. Their suggestions included tax rebates to private landlords that can be passed on to tenants.

‘It would help if a rebate was given to the landlords, like in the Sars period,’ said SRA executive director Lau Chuen Wei.

During the Sars outbreak in 2003, the Government unveiled a $230 million relief package, with $155 million going to tourism-related industries. This included rebates to commercial property owners, producing tax savings of $56 million.

Though it was not made mandatory, landlords were ’strongly encouraged’ to pass on the savings to tenants, mostly shops, restaurants and hotels. HDB did the same for commercial tenants.

In a sign of the impact of the current downturn, five companies approached the Singapore Business Federation for help last year, compared to none in 2007.

They were unable to pay their increased rents and asked for help in extending the deadline for them to move or negotiating rental.

Asme president Lawrence Leow said he has heard of tenants negotiating successfully for lower rents by promising to sign on for a longer lease period.

His advice to tenants hoping for a better bargain: ‘You must give the landlord some sweeteners.’

For assistance, struggling companies can approach five enterprise development centres (EDCs) around the island. These are one-stop centres where business consultants will give advice on where companies can go to get funding and what they can do.

Source : Straits Times - 17 Jan 2009

No comments:

Post a Comment