Collateral damage: SMEs to bear the brunt of new JTC subletting rules

Higher rents await small tenants.

The JTC’s revised policies on industrial subletting might spell difficulties for the country’s entrepreneurs. While small and medium enterprises grapple with the new rule, consequences for big REIT landlords are surprisingly muted.

According to a report by UOB Kay Hian, the new rules could spell higher rentals and hurdles for SMEs, as REITs are more likely to prefer big tenants to maximize the new sub-letting guidelines.

The report noted that unintended policy consequence of higher rental costs for SMEs may arise especially if SMEs are unable to meet the minimum 1,500sqm requirement.

"While rentals are likely to already be differentiated as larger occupiers enjoy lower psf rentals due to larger space commitments, longer leases and economies of scale, the additional hurdle of having to meet the "anchor tenant" classification and the 70% sub-letting guideline will further magnify rental differentials between larger anchor tenants and smaller tenants. In effect, this creates a two-tier market even within the same building, with REITs more likely to offer rental concessions to secure attractive larger anchor tenants,” UOB Kay Hian stated.

Here’s more from the report:

Following our extensive consultations with seven industrial REITs, we note that while impact on REITs will be minimal in the short term, key implications could include higher rentals and hurdles for SMEs, together with increased difficulties in executing on sale and leaseback transactions and also redevelopment opportunities.

Impact on Industrial REITs muted in near term due to high average occupancies (93.6%) across the industrial REITs sector and with most buildings largely compliant with even the revised 70% anchor tenant requirement (eg AIMSAMP is already fully compliant).

Also, REITs typically aim to secure high pre-commitments ahead of redevelopment (AEI) opportunities and acquisitions, with new Build-To-Suit (BTS) (eg MIT’s Equinix Data Centre is 100% pre-committed) already compliant. 

Impact on SMEs mitigated by higher supply of industrial space with 5.3m sqm (13% of existing stock) due for completion in next 3 years, and with the upcoming space 68% pre-committed.