Friday, January 2, 2009

Weak link between shop rents and prices

Wong Kin-ming is an associate scholar at The Lion Rock Institute , SCMP(Insight~A9, Other Voice 2009.1.2)

Hong Kong's retail sector has been hard hit by the economic slowdown. Property agents anticipate rents will continue to fall, and some individual landlords have acted quickly, slashing charges by more than 20 per cent.

Meanwhile, The Link Reit bucked the market trend by raising rents in its markets and malls, drawing criticism from politicians. Although the Legislative Council voted down the motion on a government buy-back of The Link's units, calls to use public money to re-nationalise The Link are unlikely to subside.

Politicians believe such rent rises will hurt tenants' interests and, more importantly, lead to increases in the price of goods, adversely affecting people's livelihood.

The notion that tenants will transfer the cost of a rent increase to the customers sounds reasonable. But let's not overlook what the recent Director of Audit's report said about the management of public markets. It said that, for various reasons including filling long-term vacancies, some rents of public wet market stalls are now only 1 per cent to 5 per cent of the going rate. Thus, there could be a huge difference in rent between stalls selling similar goods in the same market.

However, there is no big price difference for the same goods in those markets. If price is determined by the rent level, why don't stallholders enjoying concessions sell their goods cheaper?

Such a phenomenon has been explained by David Ricardo (1772-1823) in his Principles of Political Economy and Taxation, when he said: Corn is not high because a rent is paid, but a rent is paid because corn is high.

Apply that to The Link or public markets and it means that the price of goods determines rent, instead of the reverse. Rents are determined by demand for those properties, and is an income derived from them. Charging rent below market rates will not affect the price of goods.

The Director of Audit's report also talks about the provision of recreation and sports services, in particular the three-month free-admission scheme to leisure facilities launched by the government to support the Beijing Olympics. The report pointed out that bookings increased significantly under the scheme, but 40 per cent of the booked sessions were not used.

Did the scheme benefit users? People who successfully made a booking did benefit, as they had nothing to lose by not showing up. But those willing to pay to use the facilities, who were unable to book due to increased demand, lost out.

The logic that low rents benefit shop tenants is the same principle. Only certain tenants will benefit from low rents created by political pressure, such as those who enjoy priority in lease renewal; are familiar with the complicated application procedures; have special connections; or are simply lucky enough to secure a tenancy.

Do not be mistaken, I am not defending The Link's decision to raise rents in a faltering economy. We should just think hard about whether it would be right to use public money to buy back or subsidise malls and markets.

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