Hawker centres and REITs: An inflation face-off?

25 November 2011
Tan Chin Keong

The Government has recently decided to restart a building programme for hawker centres - an icon of local food culture that is often neglected as a property asset class.

These mass market spaces house food stalls that serve up the true taste of Singapore. There are 112 hawker centres today, the last one having been built in 1985. After 26 years, the plan to build 10 new such establishments in the next decade is a welcome move.

But this is not simply because of the growing trend of Singaporeans eating out. Some Government officials have argued that hawker centres could also help contain inflation. Consumer prices in Singapore have been on the rise since late 2009 and the inflation rate recorded last month was 5.4 per cent - the fifth straight month that the reading has topped 5 per cent. With about 6,000 licensed hawkers selling cheap cooked food around housing estates today, there is a strong case for such an argument.

Anecdotal evidence suggests that hawker stalls in mature housing estates such as Toa Payoh have held food prices steady for many years. A bowl of fish ball noodles at a stall I have been going to has cost a affordable S$2.50 for the last few years. This is likely because many hawker stalls enjoy rental subsidies from the Government.

In Parliament early this year, then Environment and Water Resources Minister Yaacob Ibrahim said about half of the 6,258 cooked food stalls in hawker centres had been subsidised. The subsidised rent for a hawker stall ranges between S$160 and S$320 a month, considerably less than the market range of S$275 to S$2,900, he said.

With more hawker centres in the pipeline and assuming no changes in the Government's subsidy policy, stall owners' rental costs are unlikely to see substantial increases. Thus, the construction of new hawker centres could very well lead to more affordable dining choices and contain inflation in Singapore.

Or could it?

Another property asset class - real estate investment trusts (REITS) - could have the unintended opposite effect of boosting inflation in Singapore. A typical REIT owns one or a pool of properties out of which rental income is distributed as dividends to shareholders. Since the first REIT was introduced in Singapore in 2002, the sector has become an increasingly popular asset class among investors due to its tax-efficient status and high dividend yields.

There are now more than 20 listed REITs in Singapore owning a variety of properties they have built or acquired. Due to their focus on delivering superior shareholder returns - as well as pressure from their investors and the analyst community - Singapore REITs have generally been proactive and efficient in raising the rental rates of their investment properties whenever market conditions allow.

For example, some of the retail REITs track their tenants' sales turnover on a monthly basis and the REIT managers would thus know who can afford to pay higher rental rates when the tenancy contract comes up for renegotiation.

The growth of retail REITs has also resulted in a larger supply of shopping mall space being concentrated in the hands of a few large REITs. Naturally, these REITs have better bargaining power against their tenants during rental rate negotiations.

One retail REIT, for example, was able to increase its rental rates by an estimated 25 per cent from 2003 to last year, significantly higher than the average 11 per cent increase in non-REIT suburban retail rental over the same period.

In short, higher REIT dividends come at the expense of higher rental costs for the tenants. This in turn filters through to higher product prices and, ultimately, higher inflation. However, we cannot blame REITs for raising rents given the pressure they face from investors and analysts such as myself to deliver higher shareholder returns.

Thus, the next time I pay a higher price for a shirt or a pair of shoes in a REIT-operated mall, I should compensate by dining at my usual hawker centre more frequently.


Tan Chin Keong is an analyst at UBS Wealth Management Research.