SINGAPORE - The hefty wage bill is now unavoidable.
And the surging industrial property market has made it a perfect storm of high operational costs for industrialists here, market watchers say.
Prices for industrial property have risen 27 per cent in the first nine months of the year, latest data from the Urban Redevelopment Authority showed, as investors seek alternatives to residential properties.
And rents, while not quite keeping pace, have still gained a significant 6 per cent in the same period.
Rental costs were highlighted as one of the three most important factors of business costs, along with labour and energy expenses, in a study by Leong Kaiwen, assistant professor of economics at Nanyang Technological University.
"This is a fundamental problem, this will be a huge problem for our companies . . . because just imagine if I stay in Singapore, instead of upgrading my products, I have to spend so much on rental, I become much less competitive than my competitors out there," he said, referring to neighbouring countries, such as Malaysia and Indonesia, where operating costs are lower.
His research, presented at the Singapore Business Federation Small and Medium Enterprise Convention, also showed that profits for 66 per cent of the 90 respondents surveyed had fallen "significantly" between 2008 and 2011.
This figure shot up to 80 per cent when limited to manufacturing, wholesale and retail trade, and transportation companies.
With the economy slowing and labour costs expected to go up further, the squeeze on companies could worsen.
Eric Tan, CEO of real estate consulting firm GSK Global, said the current rates of increase will add another 3 to 5 per cent to existing business costs.
One end-user has been hit by a 30 per cent jump in fixed costs over the last few months.
Wong Ghan, managing director at Speedy Industrial Supplies, said his company pays a rent of around $1.80 per square foot per month (psf pm) since it renewed its lease in September, up from $1.20 psf pm previously.
The rents have eroded his profit margins and are hampering expansion of operations here, he said.
Trade bodies said they are watching the situation.
Chan Chong Beng, president of the Association of Small and Medium Enterprises, said members have given feedback on the rising prices and rents for industrial property.
Lam Joon Khoi, secretary-general of the Singapore Manufacturing Federation, said the impact from rising business costs and declining global demand was very challenging for local manufacturers.
Lim Kien Kim, head (industrial) at Knight Frank, noted that the logistics sector was a good indicator of the impact of property market movements.
"Because (for) logistics businesses the margin is very thin, so if there are any price (changes), like rental movement upwards or downwards, they are very sensitive to this," he explained.
Asst Prof Leong's study showed that occupancy rates remained stable despite two notable hikes in rental in recent years. But this did not mean that manufacturers were doing well, he said.
"A lot of them were actually making net losses, they were not actually profitable."
Knight Frank's Mr Lim said the direct impact from the added costs may not be immediately evident.
Industrialists have been passing some of the added costs back to consumers, and the effect has not been felt because the economy is still steady, he said.
Minister for Trade and Industry Lim Hng Kiang told Parliament last month that the government will release sufficient land through the Industrial Government Land Sales programme to meet the need of industrialists and moderate prices and rentals.
The ministry has also started to release smaller land parcels with shorter tenures for small and medium enterprises that require facilities at more affordable prices, he said.
"In addition, we will continue with our enforcement efforts to ensure that industrial space is not misused by non-industrial users, which may also have contributed to the increase in industrial prices and rentals," he had said.
The minister also explained why the ministry will not bar foreign investors from the industrial property sector.
He said their participation gives industrialists options, reduces their capital costs upfront and keeps rents competitive.
It may be inevitable that some companies will have to shift out.
Tan Boon Leong, director of industrial services at Colliers International, feels that companies that require large plots of land will eventually have to move abroad where costs are more competitive.
"I think that sunset industries; those that are not used to paying higher labour costs; or cannot compete in the market; they will definitely have to move out."
Mr Wong from Speedy Industrial Supplies, whose company takes up 30,000 square feet of space at 171 Kallang Way, has not ruled out this option.
It has another plant in Malaysia.
"We have to groom the people over there and maybe not depend so much on Singapore," Mr Wong said.