Tuesday, November 07, 2017

Outlets cannot support high rental

The price for private residential property is now $1,700 psf. It is extremely high. A 800 sf apartment will cost $1.36 million.

A young family can afford it only after getting financial help from their parents to pay the down payment and take a 30 year loan, at the current low interest rate, to pay off the balance.

When the interest rate increases or they lose their job, they will face great financial difficulty.

But the buyers are willing to pay this high price because they think that property is a good investment and the prices will continue to rise, due to shortage of land.

This kind of thinking can also be applied at any price, regardless of high ridiculously high, right?

Developers consider that retail space should be two times of the shop space. They try to sell retail space at $3,000 psf or higher.

They try to rent the space at $10 psf (for a 4% yield). The rental for a 300 sf space would be $3,000. There are additional costs that need to be covered, i.e. wages, utilities, etc.

Many retailers or food outlets cannot survive at these high rentals. So, the outlet space becomes vacant. There is a high vacancy rate.

Residential property can continue to be high, due to the expectation that the prices will keep increasing. But the retail and outlet space tells a different story - the rentals and prices cannot be supported by the business.

Tan Kin Lian

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