Kyith over at Investment Moats has a rebuttal to why REITs aren’t the main culprit of rental woes.

I completely agree with his main point but based on the public sources he’s implicitly referenced (here and here), I suspect that’s not the gist of what the sources are saying. Therefore, I suspect his post was made in reference due to private conversations he’s had with other people and given the news, I’m not surprised that there are some people who would blame the big, ugly machinations of a corporate entity like the various REITs for the woes of mom-and-pop tenants.

Nonetheless, he’s done a very good analysis of why REITs aren’t the culprit. Without taking you through his analysis, let’s do a little thinking of our own on why his analysis is spot-on. It’s all simple economics.

If REITs had that much power and really controlled much of the supply of retail space, then it would automatically mean that they have a monopoly and as a group, would be earning enormous profits for their shareholders. If that were so, investors would and should have also pushed the prices on such investments to a price where yields, relative to other investments are unnaturally low. Any market observer will tell you that this certainly isn’t the case.

Furthermore, if we think about how REITs could go about obtaining such a monopoly, then it would mean that other non-REITs would find hard to develop malls of their own due to difficulties obtaining land to build the project on etc. To this point, it certainly helps that REITs have sponsors who are typically large developers that provide a pipeline of malls that can be injected into the REIT at a later date but this hasn’t stopped non-REIT related developers from developing malls. The failed iluma and Jurong Point are examples of non-REIT related malls.

Also, the malls with lots of vacancies are evidently ones that have been doing badly for years- think Pacific Plaza or those that are badly in need of rejuvenation but find it difficult to do so because of the ownership structure – e.g. Far East Plaza.

Add to that the successful suburban malls that have popped up over the last few years- think jem, Westgate and Seletar mall for example and you have a complete story of why the bigger problem for the retail sector is one of oversupply for a lackluster demand (last I heard, the Singapore and world economy isn’t exactly peachy).

If REITs were the main contributory factor, instead of complaining, you should go out and exchange fistfuls of dollars for REIT units.

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