This assignment is to analyze the determinants of rental values of retail properties based on Singapore market. It starts with explaining concept of rent theoretically, and then analyzes the major economic determinants in rental value and interactions with other industries and other property sectors. Lastly highlight the investment decision making of property as a financial asset with other financial assets.

Literature Review

In order to identify the determinants of rental of retail properties, we need to understand what causes rental to be paid, what determines the amount of rental and what causes rental to change over time. Fraser (1993) introduced the concept of the rental as a surplus by giving the answers to these 3 questions. He supposed a farmland to be rented out in on open market with competition of 2 farmers, farmer needs to pay the rent by excluding other competitors, and the rent comes from the profit which revenue minus costs, by setting aside the normal profit of survival, the remaining is called a surplus that eventually used to bid for the tenancy. Therefore only the most efficient farmer with the skill of making best use of the farmland is able to bid high enough to win the tenancy. He also pointed out the changes of the rent are due to the change of expected surplus of using the land.

As we can from Fraser’s concept, the changes of rent are due to changes of expected surplus which ultimately replies on the changes of productivities and the cost of productions. In retail property context, rental value is determined by the expected abnormal profit of potential retailers. However the one of the limitations of this model is based on a perfect market where people have full access to information, secondly it is also assumed there is free of interventions or planning constraints and also this model is only based on demand-side of land use.

Access-space model was contributed by Alonso (1963) to indentify the declining relationship between the price of the land and the distance from the city centre. There are 2 strands of implications were pointed out: household will locate at the centre of a city to minimize the transport cost and household will locate at a point where saving on land costs higher than the transport cost.

In retail context, this model implies a trade-off between the location and land use which introduces a negative rent gradient. In other words, the city centre is regarded as more valuable as the high level of accessibility. The correlation between the rent per m2 to the locations of different forms of retailing also has been suggested diagrammatically by Balchin, Kieve and Bull (1995)

C:UsersQingpingDesktopNegative Rent Gradient.jpg

(Source: Balchin, Kieve and Bull (1995), Hypothetical turnover or rent gradient within a major shopping centre, P59)

Dipasquale and Weaton (1992) examine the determination of property rent in a boarder prospective by incorporating the assets market. This model suggested the interest rate, inflation rate and foreign exchange rate also influence the level of rent and I will cover these factors in details in later of assignment.

(Source: to be confirmed)C:UsersQingpingDesktopDiPasquale-Wheaton’s Model_副本.png

Barras (1994) graphically illustrated how property rent is related to the property market, economy and credit market. The graphic shows the existing supply not enough to address the increased demand when economic upturn arrives, hence rents rise, yields falls and it triggers more and more new developments because of high profitability. If credit expansion also occurs, banks will drop the interest rate to reinforce economic growth and also start to fund speculative activities. Property boom starts to form but with limited supply due to time lags. Inflation would have risen at this stage of cycle, the delayed excessive supply flood into the market and subsequently press down the rents as well as the capital value. Interest rate is elevated to curb the inflation, this will further reduce the demand and the rents drop further until the stages property developers going bankruptcy.