Rent-Seeking Behaviour

One of our favourite imported goods store, Silver Palate, is closing down after 6 years in operation. This has been a favourite neighbourhood store for the expatriates living here for its fair prices (compared to many other imported goods stores), and a chat with the clerk revealed that the landlord wanted to raise rents triple. Similarly, book stores are closing one by one in Singapore – Borders, Harris and Page One, one by one. All quoted the same issue, that the landlords are increasing rents as much as double the previous rate.

Students of Economics know that Adam Smith noted three means of income: profit, wage and rent. Much arguments have been made about the wealth-creating ability (or lack of) of rent. Arguments against rent note that rent takes away from the creation of wealth by creating unproductive overheads (unlike utilities or wages,which are productive) for the profit seekers. Rent-seeking behaviour also takes away from the creation of wealth by directing efforts towards securing “strategic locations” or (in extreme forms) lobbying government for certain portion of taxes to be given to a certain body.

Arguments for rent-seeking behaviour noted the investments needed, for which the rent is a form of returns on the risk taken. Proponents also noted that rent itself is only a “gross income” for which other overheads like the maintenance of the property and payment of taxes have to be counted against – making “rent” a form of profit-seeking behaviour.

One of the reasons why it is so difficult for start-ups to grow in Singapore is this very same rent-seeking behaviour. Rents in Singapore can be very extreme. Imagine, as an entrepreneur, that you have managed to get a year or two of some decent profits. Unfortunately, your landlord also noticed your roaring business, and wants his share. It can be very heartbreaking, especially if you are doing a food business in a decent location, to move on and start again elsewhere, rebuilding your clientele.

I have been a landlord before. My empathy for my tenants (they, like me, are foreigners in a foreign land, trying hard to earn a living to pay off debts and return to their homeland) meant that I kept my rent artificially low. When I finally decided to sell my apartment, they had by then paid off their debts and could return to their homeland. Till today, we still keep in touch, and I know they have started businesses in their native lands. Still, the experience allowed me to understand that landlords who refuse to raise rents are not landlords – they are social services.

While I can understand the feelings of the public (the customers) and the businessmen (the profit-seekers), I believe rent-seeking is unlikely to go away. What the landlord should do is to gradually increase rents so that businesses can plan for it. A sudden tripling of the rent makes for difficult businesses, and a loss of a partnership beneficial to both landlord and tenant.