A low return on purported greed

Next Magazine (Second opinion A004, 2013.05.16)


Landlords are greedy. Owners of retail shops are especially so. They put up rents driving small businesses to close. They especially have it in for our favorite local restaurants that make dumplings, congee, noodles and other delights the way that no-one else does. At least that is the story in much of the media. Is it true?

As it turns out neither facts nor ethics support the assertion that landlords are any greedier than the rest of us. First some facts. Retail properties have a rental yield of 2.4% according to the Rating and Valuation Department, amongst the lowest of any class of property. In fact only the largest (>1722 sq ft) residential properties have a lower yield (2.2%). Retail property yields have dropped by 50% over the last 6 years, more than any type of property other than factories.Since 2009, commercial shop rents have increased 48% in aggregate, whilst prices for those shops have shot up 203%. During the same period, residential rents have jumped 59%.Of course these aggregate numbers conceal some much higher increases in areas that are popular or where demographics are changing, particularly the narrow strip from Western District to Causeway Bay, space where for high-end retailers is in particularly keen demand. I must say though, I have lost as many favorite eating venues to the bulldozers of the Urban Renewal Authority (URA) as to higher rents.The numbers show that the caricature of the landlord as a greedy renter is far off the mark. Indeed the numbers raise the issue of why shop rents have not increased more and kept pace with higher property prices? The most likely answer is that competition between landlords does constrain prices. There are a limited number of good tenants, particularly for successful businesses. Larger malls attract many of the best tenants. New properties are being developed or old ones improved, putting pressure on owners to also upgrade their properties. This costs money. However, the process of upgrading property delivers us better shopping experiences and a more pleasant built environment. There is no question that landlords will put up rents when they think that they can, by as much as they can without losing their tenants. They might trade off reliability of the tenant, with the desire for a good mix of shops in their complex that can attract more traffic. However, commercial leases can be long, so rental revisions do often lag the wider market on the way up and down. When the market turns, bargaining power shifts rapidly. Hong Kong landlords can be nimble in offering concessions and supporting fit-outs to make sure that they don’t miss a few months of income. Vacancies are costly. The very crescendo of commentary about excessive rent increases does suggest that we may indeed be near a peak for rents and prices.

What of the morality of the landlord increasing rents? Surely it cannot be “greed” that is the real objection, since we know from the time of Adam Smith that: “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest”. No one objects to a pay rise on the grounds that, as a result, his or her employer might go out of business. We recognize that in restaurants the best produce to cook the best food costs more. Land is but one more input with many uses that is better allocated by markets than politicians.Why special concern when higher rents see old shops give way to new? Ancient prejudices view land owners as not earning their “rents”. Yet it is a particularly odd to hear this view in Hong Kong, where it is only the improvements to the land that are private as the government retains the ownership of the land. Any change of use and many improvements require steep payments to the government. Indeed improving land is taxed so heavily in Hong Kong, that we likely get less improvement than is optimal. Rent controls produce slums, poor hygiene and create poverty traps for shops and residences subject to those controls. Societies that do not recognize property rights and attenuate the rights of land owners or investors have a poor track record protecting other human rights. The best way to preserve our favorite shops is to patronize them.

Bill Stacey is in his 10th year as a resident of Hong Kong and is Chairman of the Lion Rock Institute.We are now on Facebook http://www.facebook.com/Next2ndOpinion

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