The Determinants Of Rental Value Of Retail Properties Economics Essay

This assignment is to analyse the determiners of rental values of retail belongingss based on Singapore market. It starts with explicating construct of rent theoretically, and so analyzes the major economic determiners in rental value and interactions with other industries and other belongings sectors. Last highlight the investing determination devising of belongings as a fiscal plus with other fiscal assets.

Literature Review

In order to place the determiners of lease of retail belongingss, we need to understand what causes rental to be paid, what determines the sum of rental and what causes rental to alter over clip. Fraser ( 1993 ) introduced the construct of the lease as a excess by giving the replies to these 3 inquiries. He supposed a farming area to be rented out in on unfastened market with competition of 2 husbandmans, husbandman demands to pay the rent by excepting other rivals, and the rent comes from the net income which gross subtraction costs, by puting aside the normal net income of endurance, the remaining is called a excess that finally used to offer for the occupancy. Therefore merely the most efficient husbandman with the accomplishment of doing best usage of the farming area is able to offer high plenty to win the occupancy. He besides pointed out the alterations of the rent are due to the alteration of expected excess of utilizing the land.

As we can from Fraser ‘s construct, the alterations of rent are due to alterations of expected excess which finally replies on the alterations of productivenesss and the cost of productions. In retail belongings context, rental value is determined by the expected unnatural net income of possible retail merchants. However the one of the restrictions of this theoretical account is based on a perfect market where people have full entree to information, secondly it is besides assumed there is free of intercessions or be aftering restraints and besides this theoretical account is merely based on demand-side of land usage.

Access-space theoretical account was contributed by Alonso ( 1963 ) to indentify the worsening relationship between the monetary value of the land and the distance from the metropolis Centre. There are 2 strands of deductions were pointed out: family will turn up at the Centre of a metropolis to minimise the conveyance cost and family will turn up at a point where salvaging on land costs higher than the conveyance cost.

In retail context, this theoretical account implies a tradeoff between the location and land usage which introduces a negative rent gradient. In other words, the metropolis Centre is regarded as more valuable as the high degree of handiness. The correlativity between the rent per M2 to the locations of different signifiers of retailing besides has been suggested graphically by Balchin, Kieve and Bull ( 1995 )

Degree centigrades: UsersQingpingDesktopNegative Rent Gradient.jpg

( Beginning: Balchin, Kieve and Bull ( 1995 ) , Conjectural turnover or rent gradient within a major shopping Centre, P59 )

Dipasquale and Weaton ( 1992 ) examine the finding of belongings rent in a lodger prospective by integrating the assets market. This theoretical account suggested the involvement rate, rising prices rate and foreign exchange rate besides influence the degree of rent and I will cover these factors in inside informations in later of assignment.

( Beginning: to be confirmed ) Degree centigrade: UsersQingpingDesktopDiPasquale-Wheaton ‘s Model_a‰???¬.png

Barras ( 1994 ) diagrammatically illustrated how belongings rent is related to the belongings market, economic system and recognition market. The in writing shows the bing supply non plenty to turn to the increased demand when economic upturn arrives, hence rents lift, outputs falls and it triggers more and more new developments because of high profitableness. If recognition enlargement besides occurs, Bankss will drop the involvement rate to reenforce economic growing and besides start to fund bad activities. Property roar starts to organize but with limited supply due to clip slowdowns. Inflation would hold risen at this phase of rhythm, the delayed inordinate supply inundation into the market and later press down the rents every bit good as the capital value. Interest rate is elevated to control the rising prices, this will further cut down the demand and the rents drop farther until the phases belongings developers traveling bankruptcy.

Calciferol: Heriot Watt CoursesReal Estate EconomicsAssignmentBarras ‘ Model of Property Cycle_a‰???¬.png

( Beginning: Barras, R. ( 1994 ) Property and the economic rhythm: edifice rhythms revisited, Journal of Property Research )

Shops are occupied for running concern by store users. In the point of view of renter, land and concern belongings are factors of production, demand depends on productiveness degree when integrating with other factors of production. Therefore the demand of a factor is derived demand ( Fraser 1993 ) . From Fraser ‘s construct we can understand store infinite is considered as a factor of retailing activities, the demand of the store infinite depends on the sale ‘s volume within the store. In the event of demand additions, it causes the monetary value and the rent additions when limited supply pumped into the market.

Fraser besides pointed out the construct of income snap of demand and monetary value snap of the demand which are relevant to the determiners of rent. When consumers ‘ income rises, they intend to pass more on the normal goods and spend less on the inferior goods, so that the demand for the normal goods additions and demand for inferior goods beads. E.g. when income additions, people will purchase more branded merchandises which are sold in premium locations and will purchase less lower-class merchandises which are sold in icky locations, therefore the rent of store infinite in premium locations will increase and the rent of store infinite in icky locations will drop by and large. On the other manus, rent is besides relevant to the monetary value snap of the demand. Land is considered monetary value inelastic as land has no replacement, hence belongings which attaches on the land besides inherit its inelasticity. However it is still possible to replace belongings in one location for similar belongings in another location despite the heterogenous of belongings, it depends on the importance of locations to the renters. E.g. industrial renter possibly easy happen a replacement location for production as it does n’t necessitate the location in really precise extent, office and retail requires more specific or more monetary value inelastic in location as the synergism consequence for office infinites and catchment consequence for retail infinites. In peculiar, shop infinite is most monetary value inelastic by and large, premier store country such as Orchard Road in Singapore is unreplaceable therefore the rent is higher than other country.

Rental value of retail belongingss is determined by some macroeconomic factors and besides influenced by broader influence from other belongings sectors and industries.

Household Income

Rental value of retail belongingss is chiefly driven by the buying power of families, and the buying power of family depends on household income from work which comes from houses, so household income determines rental value of retail belongingss. Below chat clearly exhibits the positive correlativities between the rental index for store infinite and mean monthly family income from work since 2001. Both of family income remains a stable degree from 2001 to 2006, so they experience the addition at the same clip since 2006 and make each of their extremums in 2008, later they both encounter reverse during the “ Fiscal Crisis ” in 2009, eventually they start to bounce from 2010 to present clip.

Beginning: Urban Redevelopment Authority of Singapore and Department of Statistics Singapore

General Economy Condition

Since rental value of retail belongingss determined by household income, and household income from work depends on the public presentations of companies, and general economic system status expresses the aggregative public presentations of companies. So rental value finally will be influenced by general economic system status which indicated by Gross Domestic Product ( GDP ) . Another chart shows the relationship between store rental index and Real GDP at 2005 market monetary values since 2001.

Beginning: Urban Redevelopment Authority of Singapore and Department of Statistics Singapore

Demographic Changes

Another strand of derivation of buying power is the demographic alteration which indirectly influences the store rental degree in a long tally. For cases, the higher instruction level the higher income hence higher buying power. Sometimes higher household income does non straight interpret to higher buying power of family, because the more dependents in a family the lower leaning to pass of that family. In Singapore context, Old-Age Support Ratio is to mensurate the ratio per elderly aged 65 & A ; above. Demographic alterations influence the buying power so influence store rents. Below charts show the tendencies of instruction degree and Old-Age Support Ratio since 1980. We can see that the general instruction degree has improved since 2001 and Old-Age Support Ratio worsening over the old ages which means both of the alterations release more and more purchasing power.

Degree centigrades: UsersQingpingDesktopEducation Profile.png

Beginning: Population Trends 2012 of Department of Statistics Singapore

Tourist Arrival Volume

Tourism industry influences retail market well, Singapore is the instance particularly. Tourism industry is one of the major subscribers to its national economic system as state itself is bantam and deficiency of natural resources. Below graph shows how shop rental index in cardinal country interacts with tourer reaching volume since 2001. Notably, Severe Acute Respiratory Syndrome ( SARS ) period ( 2002 to 2003 ) , the tourer reaching volume drops drastically and followed by rental index ; during the period of “ Fiscal Crisis ” ( 2008-2009 ) , volume beads once more every bit good as rental index. On the other manus, when Singapore ‘s 2 Integrated Resorts ( IRs ) opened and the universe foremost F1 dark race launched in 2010, the volume goes historically high of about 11.6 million which is about 20 % addition compared to the twelvemonth of 2009, later we see the increasing tendency in rental index after 2010.

Beginning: Urban Redevelopment Authority of Singapore and Singapore Tourism Board


One of the looks of Inflation can be seen as addition in rental value, rising prices is a rise in general monetary value degree of goods and services. Property proprietors including commercial belongings proprietors increase the rental to fudge against the eroding of their existent rental income. Singapore store rental index in cardinal country by and large shows the similar increasing path with consumer Price Index.

Beginning: Urban Redevelopment Authority of Singapore and Department of Statistics Singapore

Foreign Exchange

Foreign exchange rate can be besides related to rental value of commercial belongings in a macro-economic degree, particularly for little economic system like Singapore, Singapore has small local retailing trade names and most of the retailing trade names come from aboard. When money cross lodgers, Foreign Direct Investment ( FDI ) occurs and foreign exchange rate would go a major consideration of a multi-national retailing corporations ( MNCs ) , e.g. hypermarket elephantine Carrefour, Wal-Mart, to make concern in Singapore. These MNCs probably have greater impact on the rental market as their demand of shop infinite is significant, the rental value will be affected drastically with a limited supply environment.


Supply of commercial belongingss is besides a determiner of rental value but seen non important as demand consequence. Development of belongings takes a comparatively long clip, usually about 3 to 5 old ages. Because of the inelasticity of supply, the rental value wo n’t be able to run into market equilibrium immediately, therefore the rental value is determined chiefly by demand factors in short tally, but supply will take effects in medium and long tally when undertakings flow into rental market. Below chart shows the relationship between supply private & A ; public sectors shop infinite and the rental index since 1998. In the period of 2000- 2001, the low degree of supply attach toing with high degree of rental index, and in the period of 2006Q2 to 2008Q2, higher rental degree induces higher supply of store infinites. Subsequently 2008Q3 “ Fiscal Crisis ” takes topographic point which forces developer to shrivel the supply drastically until 2001Q1, this reduction of supply maintained the rental index comparatively stable over this period. These groundss explain the contrary relationship between supply and lease. The supply of commercial belongingss usually is affected by the general economic system, new investings, authorities planning and intercession. Unlike supply of other goods, existent estate supply is ever chunky. When supply comes in or drawn out from the market in majority, it will impact the market equilibrium drastically. For illustration, VivoCiy ( Net Lettable Area of 96,600 samarium ) , Shoppes @ Marina Bay Sands ( Net Lettable Area of 74,322 samarium ) , 313 @ Orchard ( Net Lettable Area of 26,891 samarium ) , Orchard Central ( Net Lettable Area of 36,045 samarium ) , sub-urban promenade Nex @ Serangoon ( Net Lettable Area of 56,000 samarium ) . Notably, it shows drastic addition in supply of store infinite in 2nd One-fourth 2006 and 2nd One-fourth 2010 when VivoCity launches and Shoppes @ Marina Bay Sands launched. Calciferol: Heriot Watt CoursesReal Estate EconomicsAssignmentReference MaterialVivoCity.jpgD: Heriot Watt CoursesReal Estate EconomicsAssignmentReference MaterialShoppes @ MBS.jpg


Shoppes @ Marina Bay Sands

Beginning: Images from Internet

Beginning: Urban Redevelopment Authority of Singapore

Random Dazes

Rental value of retail belongingss is besides capable to random dazes, such as war, Asia Financial Crisis ( 1997 ) , Severe Acute Respiratory Syndrome ( SARS ) ( 2002 ) , Credit Crunch ( 2008 ) . All these random dazes have important impact on overall public presentation of economic system, later impact on the retail market.

Across other belongings sectors

Compared the store rental index to the indexes of other belongings sectors, we can see they by and large exhibit similar tendency since 1998 Q4 to 2012 Q2. They all experience stable motions prior to 2006, so breasting with different amplitudes until 2008 Q2 when market dips and eventually retrieve to present clip. It shows that the all belongings sectors are influenced by similar economic outwardnesss.

Beginning: Urban Redevelopment Authority of Singapore

Across other industries

Spillover consequence from other industries besides impacts on rental value of store infinites. In 2005, Singapore Prime Minister Lee Hsien Loong announced that authorities to O.K. to construct two Integrated Resorts ( IRs ) ( Resort World Sentosa and Marina Bay Sands ) in order to supply a fresh, interesting and moneymaking option. In add-on, building the two IRs meant that there would be a “ spillover consequence ” on other sectors of Singapore ‘s economic system, particularly on concerns within near propinquity to the IRs. When two IRs clears in 2010, one-year tourer reachings hit a historical high of 11.6 million ( Channel NewsAsia, 2010 ) . By February 2012, 60,000 occupations had been created in the IRs and across the broader economic system, lending 1 to 1.5 per cent to Singapore ‘s gross domestic merchandise ( Government reexamining IR regulations – Straits Times, 27 February 2012 ) . High tourer reaching volume and GDP growing will lend to a higher rental value of store which I have mentioned in early portion of this article. Another local illustration is Singapore hosting the universe ‘s fist Formula 1 dark race which once more attracts higher tourer reaching volume and entire tourer outgos and finally hike the retail concern in close propinquity. In the long tally, these 2 iconic undertakings will go on to heighten Singapore ‘s prospective peculiarly the investing prospective in retailing concern which in bends will positively impact on store rental value.

Property as a fiscal plus

Property besides can be a fiscal plus ( Michael Ball, et al. , 1998 ) which generates future hard currency flows. Output is used to mensurate the rate of return of an investing for rent collectible, output peers to Net Operating Income ( NOI ) divided by Capital Value. In other words, rental output is affected by monetary value, but non to the full. An investor can take an investing from assets market harmonizing to his/her hazard penchant. Jack Harvey ( 2000 ) listed down a series of investing in assets market including Money ( M ) , Treasury Bills ( T ) , Debenture or Bonds ( D ) , Irreclaimable Bonds ( B ) , Ordinary Shares ( S ) , Mortgage Loans ( Mo ) , Leasehold Investments ( L ) , Freehold ( FH ) and Freehold Ground Rents ( FGR ) . Each plus has its ain grade of hazard, Property investing seen to be less hazardous than stock market but more hazardous than say bond market. Peoples use alternate assets to benchmark the output of belongings assets and besides use the motion of most liquid assets such as money, hoarded wealth measures to calculate the motion of belongings market. Hence rental output is affected by other type of assets in fiscal assets as good.


The influences of the rental value of retail belongings are complex. It chiefly depends on the buying power of the population, and some influences derived from buying power come into the image such as the family income, national economic status and demographic alterations in a long tally. In a short tally, the tourer reaching volume, rising prices and exchange rate besides have their impacts on finding the rental value of retail belongingss. On the other manus, supply of store infinite is induced by high rental value in investor ‘s point of view but is negatively related to rental value if it is excessively much. In a broader position, the spillover effects from other industries and other belongings sectors besides play functions to travel the rental value of store infinite up and down, random daze has its lay waste toing power on belongings sectors including retail.

As the universe evolves and integrates, retail lease value is determined by broader and deeper factors which traditionally have small influence. For illustration, retail concern has more and more to make with fiscal market. In recent twelvemonth Real Estate Investment Trusts ( REITs ) become popular, retail belongingss can be securitized and traded in fiscal market, this connexion with fiscal market increases its finding power in rental value of retail belongingss.