From 1 June this year, lessees of HDB industrial units are not allowed to sublet their units. Those with existing subletting agreements have up to 31 Dec 2017 to comply. Ultimately, there will be no more subletting arrangements. According to the HDB, the intent of this move is to ensure that businesses right-size their units, and if they did so, they might be given a lower quantum. In this article, we apply strategic thinking to ask if this is the right thing for HDB to do.
HDB says that the rationale for the move is to ensure that tenants right-sized their operations; if they could not afford a large space, they shouldn’t get one. Yet, it is difficult to say why this is necessary. After all, if the business could find a sub-tenant to share the rental with HDB, what is that to HDB? Could it be that there are businesses that are benefiting from subletting, diverting potential income away from HDB and into the hands of the main tenant?
Why would one sublet?
There are many reasons why a business would want to sublet:
1. When business has shrunk
It could be that when times were better, the business required the space. Then, when business shrunk, the company could not hold on to such a large space. Yet, if they had just recently renewed the lease, they cannot let it go. Anyway, what if business does come back? How can they expand so quickly at the right price? So the solution is to sublet for the time-being. This is a very prudent practice.
2. When they are planning an expansion
Another scenario would be when the company is planning an expansion and took on a larger unit. Yet the time is not right for the expansion, and hence, they would have to sublet to maximize the use of the property. Again, rather prudent.
3. When there is a collaboration
When businesses collaborate, they tie their operations together. One of the best ways to do this is to share premises through subletting. This gives them economies of scale as well as to reduce transportation costs. It makes perfect sense to sublet.
4. When the opportunity presented itself
Finding HDB industrial space is not very easy because the demand for them is high. So when an opportunity presents itself, a business might go for it, even though the unit may be too large. They can mitigate the higher rental through subletting.
A viable business operation
Subletting is a viable business operation one which has allowed many small businesses to stay afloat while being close to their customers. By pulling this option from tenants, they make it difficult for both businesses – the main and sub-tenant. Rather than trying to be smart, HDB should look to drive more business to our SME companies. After all, it is already difficult to run a business in Singapore with its high cost base without meddling by the authorities.
One does wonder why the HDB is doing this because it doesn’t seem to help local businesses.