A recent investigative report by The Straits Times found a diverse array of non-industrial businesses and institutions taking up space in industrial estates. A check by the reporter across places like Woodlands Industrial Park, JalanPemimpin, Alexandra Industrial Estate and Henderson Industrial Park found furniture markers and warehouse operators co-located with offices, churches, tuition centers, travel agencies and fashion retailers.

Rental arbitrage is the root cause of this phenomenon

The root cause of this phenomenon is what I call rental arbitrage – businesses taking advantage of lower rents in industrial areas (around $2 psf) versus commercial buildings (up to around $9 psf).

These non-industrial users are technically violating URA guidelines as these spaces are meant for businesses like manufacturing, storage, workshops and certain e-businesses. There is also some allowance for supporting facilities like childcare centers and canteens. If the URA investigates these violations they can ask the business to stop, failing which they can be fined up to $200,000 or even jailed.

Some observers argue that these non-industrial businesses are hurting genuine industrialists as they push up rents in these spaces, while others argue that forcing these non-industrial businesses out will hurt the growth of SMEs as they can’t afford commercial space in the first place.

The end of shoe-box factories?

Even Minister Khaw has chimed in by chastising non-industrial tenants who are “abusing” lower rents in industrial buildings, labeling what they’re doing as “wrong”. At the center of this controversy are units known as shoe-box factories that are as small as 50-100 sqm.

We first saw the shrinking of apartments as property prices rose and developers strove to maximize their selling price per square foot while keeping total unit costs affordable for investors. As the Government continued clamping down on the residential sector with anti-speculation measures many investors shifted their attention to the commercial and industrial sectors.

And developers, ever ready to take advantage of any opportunity to cash in, started creating smaller units in industrial projects that they could strata-title and sell to these yield-hungry investors.I think it was implicitly known by the developers and investors right from the beginning that the potential tenants for these shoe-box factory units would largely not be industrial users.

For some reason, approvals for these projects were given by the relevant authorities anyway. However, according to Minister Khaw, JTC has estimated that a genuine industrial end-user would need at least 150 sqm of space, and the URA has also used a similar norm. Thus going forward, we are not likely to see new industrial developments with shoe-box units – they will likely not secure the necessary approvals.

Does industrial zoning still make sense?

Given the media’s and the Government’s attention this issue, the URA might also start cracking down on violators. I believe that this would be an unnecessary blow to the SME sector in Singapore.

In the first place, are there enough genuine industrial users to fill the space? One of the landlords quotes in The Straits Times article mentioned that he gets one enquiry for larger spaces measuring 20,000 sqft or more versus four to five calls for spaces of 1,000 sqft or less. There is simply less demand for large-scale industrial activity, especially in general purpose industrial buildings.

Furthermore, older industrial buildings built without facilities such as loading bays will find it hard to get genuine industrial tenants. Does it then make sense to leave these spaces vacant or to be more flexible in their usage?

Furthermore, the lower rents in industrial areas are supposed to help industrialists keep business costs low. In effect, they are a subsidy by the Government to help the industrial sector stay competitive in a tough global market. But are they then saying that industrialists (whether SMEs or not) are worth subsidizing while non-industrial SMEs are not? The definition of industrial use is already fairly grey – does it make sense to penalize certain types of businesses while subsidizing others? Do industrial users add more value to the economy versus other types of businesses?

High rentals can be fatal to SMEs

Many SMEs can simply not survive if forced to pay full commercial rents, which will be a drain on their startup capital even as they struggle to build a customer base and make profits. I have a friend in the fashion retail business who says that it is almost impossible for any new entrant to survive in malls today with rents of close to $20 psf. A 1,000 sqft shop can cost $20,000 per month in rent, which can be fatal to the proprietor if business is bad for a few months.

In order to encourage and nurture the growth of SMEs, perhaps the Government can consider the relaxation of the use of these spaces. Doing so could unleash a flurry of commercial activity in otherwise deteriorating industrial areas, while at the same time giving SMEs the space to get a foothold in the market without being crushed by huge rental overheads.

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