HOUSING AND DEVELOPMENT BOARD SHOPKEEPERS (Increase of rentals)

Dr Lily Neo asked the Minister for National Development whether he will reconsider the increase of rentals for HDB shopkeepers in view of the plight of the HDB retailers and the present economic downturn.

Mr Mah Bow Tan: Mr Speaker, Sir, the increase in HDB shop rentals is part of an ongoing exercise since 1988 to equalise the rentals for similar shop premises so that all shopkeepers operate on a level-playing field. Over the years, a disparity in rent has arisen because some HDB shop tenants are old resettlement cases, paying highly subsidised rates while other tenants have obtained their premises by tender, paying market rents.

To moderate the impact on tenants who have been paying subsidised rents, HDB staggered the rental adjustments towards prevailing market rate over four renewals, at 3-yearly intervals, in other words, over a 12-year period, starting from 1988. The implementation was also carried out in phases. Tenants who are renewing their tenancies for the 4th time this year were converted to the 3-year fixed tenancy in 1989. They had their tenancies renewed for the first time in 1992 and the second time in 1995. At each renewal, the rental increases were capped at 30% of existing rents. When the tenancies were renewed for the third time in 1998, the rents were raised to 75% of market rate. The final adjustments to market rents are taking place now, at the 4th renewal of their tenancies. Some rents have been increased, while others have been maintained or reduced.

By moving all tenants gradually towards the appropriate market rates, HDB ensures that all shopkeepers compete on a level-playing field. This is only fair to all shopkeepers. However, recognising the present difficult economic conditions, HDB will be enhancing the rental rebates for all its commercial and industrial tenants across-the-board. The rebates will provide some relief to all HDB shop tenants, including those whose rents are being adjusted upwards towards market rate. The details of HDB's rebates will be in the package of measures to be announced by the Minister for Trade and Industry in his Ministerial Statement shortly.

Dr Lily Neo (Kreta Ayer-Tanglin): Mr Speaker, Sir, I would like to declare that I am a lessee of an

Sir, I would like to pose three questions to the Minister.

May I ask the Minister whether the recent efforts to assist HDB shop retailers in their predicaments would be defeated by the adjustments of HDB rentals to the market rates? May I ask whether the market rates that are being used as benchmarks for the present rental adjustments reflect the prevailing economic climate? And also may I ask whether the present method of assessing the market rates, based on recent HDB lettings, is a fair practice? Because it has been known that many novice and enthusiastic new lessees always tender higher prices and be successful at such prices that do not conform to the prevailing rentals.

Mr Mah Bow Tan: Sir, let me take the last question first which pertains to the method of assessing market rates. What are the so-called market rates, are they fair market rates - I think that is the thrust of the Member's question. What HDB does is that it appoints a panel of valuers, and these are private sector valuers, these are not HDB valuers, to assess the market rates based on, first, the rentals that have been tendered in the area, but also taking into account the specific location of the shop, the micro location of the shop, the orientation of the shop, the traffic of the shop, the size of the shop, and so on. So in this respect, the fair market rate that HDB uses to adjust the rentals is a result of professional judgement on the part of this panel of valuers. I think the Member would realise that valuation is not an exact science, there is a judgement involved. But that judgement is exercised by professionals and is exercised independent of HDB. HDB will then take that value and use it as a market benchmark rate.

What happens if a tenant is not satisfied with that rate? He has recourse to several avenues of appeal. The first avenue of appeal is HDB itself. He can defer the signing of the tenancy agreement pending an appeal to HDB. HDB will then assess the merits of that appeal and decide accordingly. If HDB's decision on that appeal is still not satisfactory, the tenant has recourse to another avenue which is the Chief Valuer himself. The Chief Valuer is of course the Government's valuer and his judgement can be taken as an independent judgement, independent from the panel of professional valuers that was appointed by HDB. So these are the various avenues of appeal if the tenants are not satisfied.

I turn now to the first question which the Member asked, which is whether these adjustments contradict or run counter to the package of measures. First of all, let me reiterate again the purpose of this adjustment. We need to, first of all, get the cost structure correct for HDB shops. What do I mean by this? If, for example, you have two shops side by side, one paying much lower rental than the other, then obviously it is going to be very difficult for competition to be fair because the cost for one shop is much lower than the other. And this was the situation when we had in many places a lot of resettlement cases.

If the Member will recall, resettlement cases were given very, very highly subsidised rentals in the early days. And we now have a situation where we have got people coming in and tendering in the open market. And we have a third situation where there are shops which are now being sold and the new landlords of these shops are now letting out their shop premises. We have got all these different types of shops and the shop tenants in each of these shops are paying different rentals. Obviously, this is not going to make for a very fair competitive environment in the neighbourhood estate. And this is reason why, in 1988, 12 years ago, HDB decided that it was time to gradually remove this anomaly and disparity in rent, so that everybody can start off on the same basis, and that is the only way for the shopkeepers to compete on an equal basis and to decide whether they are able to do that kind of business in that area or not. And that exercise has been going on, as I indicated earlier, for the last 12 years.

Many of those shops had their rentals adjusted. All of them had their rentals adjusted upwards in the course of the last 12 years at varying rates of increase. The last increase was in 1998. In fact, during the last crisis, at the third renewal, rentals were increased, but up to 75%. At that time, when they were renewed for the third time, tenants knew that, at the next renewal, rentals would go up to market. Of course, since 1998, the prevailing market rents have also come down. So when we are talking about adjusting to market, we are actually not adjusting the last 25%, but we are actually adjusting less than that in most cases. There are some cases where the adjustments are slightly higher, but most of the time, the adjustments should be slightly less. And the purpose of all this is really to make sure the cost structure is correct, that the operating environment is fair to all.

Having done that, we look at the situation at the moment and we have decided, after a review, that we will do an adjustment across-the-board. And this would benefit everybody, not just those whose rentals have been adjusted upwards, but also those rentals which have been maintained or which have been brought down to market. So everybody still continues to operate on a level playing field. And I think this is the best way to ensure that the shopkeepers are able to compete and compete fairly, and they are able to make a considered decision whether the costs that they are incurring allow them to do the kind of business they want to do.

The package of measures that we have announced recently complements this in the sense that for those who find that they are not able to continue to do business at these fair market rentals, there are various options open to them:

(1) They can sublet their shop. They are allowed to sublet their shop, either half or, if they wish to, they can assign the whole shop to somebody else.

(2) They can change their trade. If they feel that this particular business is not doing well, they can decide to change the trade to something else, or they can assign it to somebody else to change their trade.

(3) They can also decide that they may want to exit the business completely, take advantage of the voluntary retirement scheme (VRS) that I announced in Parliament during the last Budget, take an ex-gratia payment of $48,000, and look for an alternative means of livelihood. MOM has put in place schemes to assist these shopkeepers who do decide to take the VRS to look for alternative jobs, or to go for upgrading or retraining. NTUC has also indicated that they are prepared to bring them into a franchise scheme. So there are various alternatives if shopkeepers are not able to cope with the rentals that have been set for them. But in the first place, I think we ought to make the rentals fair across-the-board for everybody, and then we decide what are the assistance schemes that we can put in place if somebody is not able to cope, and that is what HDB has done.

Dr Lily Neo: Sir, the Minister did not answer my second question whether the market rates that have been used as a benchmark for the recent rental adjustment reflect the present economic climate.

Mr Mah Bow Tan: The market rates are set on a regular basis. Every year, the market rates are set. And looking at the trend of the market rates that I have seen, it went up from 1995, it peaked around 1996/97 and it has started coming down, and today, the posted market rates are about 20% below the peak which is similar to what I see in the private sector market. So to that extent, I would say, yes, the present current market rates are reflective of the current economic conditions. But that is on a general basis. If there are any complaints about market rates not being fair, the Member should bring them to my attention and I will look at it on a specific basis. Because as I said earlier, market rates do vary from location to location and they do vary even within one location, from floor to floor, from direction to direction, and so on.

Mr Gerard Ee (Nominated Member): Mr Speaker, Sir, those who have tendered or bought shop units would be aware of the competition and of the rental paid by the competition. Is it therefore necessary or even fair for the HDB to interfere with market forces and adjust upwards the competition cost?

Mr Mah Bow Tan: Sir, the HDB's adjustment to market policy has been known. As I said, it has been in existence since 1988. So I presume that those who have tendered would also be aware that HDB is actually undertaking this exercise and that rentals will be adjusted gradually to market for its competition.

Dr Lily Neo: Sir, may I ask the Minister whether our present policy jeopardises struggling HDB retailers who cannot afford higher rentals by forcing them out of business and depriving them of their livelihood? Could the Minister consider readjusting our policy to better cater to the demands and needs of the day?

Mr Mah Bow Tan: That is precisely what we are doing, to try and better cater to the demands and needs of the day. If the shopkeeper finds that he is unable to cope with the rental increases, as I said earlier, there are other avenues for him to continue to earn a living, including subletting his shop, and having sublet his shop, taking that revenue to defray part of the cost of his shop, or assigning the shop to somebody else and still being able to earn some income or, alternatively, exiting from the retail trade altogether. But to subsidise and to continue to subsidise, as the Member is suggesting, some of these shops in order to keep them in business is, I think, not a correct approach for HDB to take.

Mr Inderjit Singh (Ang Mo Kio): Sir, I have a question on the valuation. I would like to ask the Minister how regularly the valuation is done. And in this round of increases that we did, when was the valuation done and, also, is the valuation done on a collective basis, or is there an opportunity to value every shophouse according to its location, type of renovation that may have been done, type of trade that it has been doing, and that perhaps will be a better way of judging the value?

Mr Mah Bow Tan: Rental reviews and valuation are done on a regular basis. It is being done now on an annual basis. Reviews on a location by location basis are done, but they are staggered. There is a programme whereby rental reviews are done on a locational basis. In the review of the rents, the professional valuers will look at the general location, specific address of the shop, they look at the direction and what the tendered rents have been. They do not just look at the highest rental, they also look at the range of tendered rentals in order to make sure that there are no exceptionally high rentals, as the Member mentioned just now. Is it possible that, in some cases, rentals are exceptionally high because somebody wants a shop very badly? I am told that the valuers also look at such exceptional circumstances, and then they finally come to a judgement as to what is a fair market rental. It is not unexpected that there is a dispute between what the tenant should pay, or what he is prepared to pay, and what the HDB says he should pay. When such disputes give rise to appeals, the appeals would then be adjudged accordingly. Each appeal is looked at seriously, and if there is any cause for revision of that rental for that specific shop, it will be done.

Assoc. Prof. Chin Tet Yung (Sembawang): Sir, may I ask the Minister whether the valuation also takes into account the different types of business? For example, I understand that childcare centres operated by private operators have been subjected to rental increases also in HDB estates?

Mr Mah Bow Tan: I am not familiar with the particular example that the Member mentioned. If he has any further details, I will be happy to look into that.

Mr Gerard Ee: Mr Speaker, Sir, I am just wondering whether the Minister's answer just now that, because the tenderer is aware that existing shopkeepers' rentals will be adjusted upwards, it would therefore create an infinite loop. They would be encouraged to tender higher and therefore, in the longer term, existing shopkeepers' rentals will have to be increased to match market rates and new tenderers will tender even higher. I am just wondering whether there is a need to review this approach.

Mr Mah Bow Tan: Sir, I am not a HDB tenderer. I presume that anybody who wants to tender for a HDB shop must look into all the factors involved, not just the fact that we are going to adjust rentals. He must also look at the business that he is in, the kind of traffic that is generated by that shop, and a myriad host of many other things. Whether this particular factor alone will give rise to tender prices spiralling upwards, I really do not know. The fact is that they know that we are adjusting everything to market, they know that there is a certain market rental, and then it is up to them to decide how much they want to tender.

Dr Vasoo: Sir, would the Minister extend the voluntary retirement scheme to all shopkeepers in the older housing estates?

Mr Mah Bow Tan: Sir, we have identified a number of areas where we think the voluntary retirement scheme would be of immediate interest, and these are mainly in the older housing estates. There is a pilot voluntary retirement scheme which has just been implemented, and we are awaiting the response from that voluntary retirement scheme. If the hon. Member would like to suggest any other area that we could apply that voluntary retirement scheme, I would be happy to consider.