Price war in workers’ dormitories

By
/ The Edge Property
|
November 18, 2016 10:00 AM SGT
Ganesh, a Singaporean entrepreneur and owner of Onshore Food Pte Ltd, operates two food courts in the west — in Tuas and Jurong. Fifteen of his foreign workers — five from mainland China and 10 from India — are currently housed in the Tuas View Dormitory at Tuas South Avenue 1.
“The availability of a workers’ dormitory near our place of business is a great convenience,” says Ganesh. “Providing transport for them is also much easier with all of them at one location.”
Each worker has his own bunk bed and locker in a room that can only be entered via a keycard. As one of the first employers to sign up for accommodation at Tuas View when it first opened over two years ago, Ganesh was able to secure an attractive package of $3,000 a month for his workers’ accommodation.
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The prevailing market rate at Tuas View two years ago was $300 to $350 per worker. A basic room accommodates 12 workers. Each room contains six bunk beds, lockers and fans. The premium rooms come with optional add-ons such as a refrigerator, additional fans or air-conditioning, tables and chairs, as well as linoleum flooring instead of bare cement floors. These are available at a higher rate.
“The market is very different now,” says Shamkumar Subramani, CEO of TS Management Services, the operator and co-owner of Tuas View. “It used to be in the $300 range per worker just 12 months ago. Now, it is down to the $200-to-$250 range.”
Generally, companies sign a one-year tenancy agreement, but the operator also offers the flexibility of three- to six-month leases for those with foreign workers on a project basis, he says.
Shamkumar: While we’re doing well operationally, the return on investment is not as lucrative as we had initially projected (Photo: Samuel Isaac Chua/EdgeProp Singapore)

Falling rates, shrinking workforce

One of the reasons for the significant drop in rates over the past year is the downturn in the oil and gas (O&G) sector, which has seen more than 350,000 workers laid off globally.
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In Singapore, firms in the offshore and marine (O&M) sector were hit when crude oil prices started to fall in 2014. Keppel Corp, for example, announced last month that its O&M business shed 8,000 jobs, or 26% of its workforce, in the first nine months of the year to September. Sembcorp Marine likewise said it had laid off 8,000 workers this year.
The slowdown in the overall economy has also affected companies in the manufacturing and construction industries. According to the Ministry of Manpower, the manufacturing sector lost 3,700 jobs in 3Q2016, marking its eighth consecutive quarter of decline. Owing to a slump in private-sector construction activity, the construction sector as a whole saw 5,200 jobs cut in 3Q2016. This contraction in construction and manufacturing is said to have affected mainly work permit holders.
“We are the first to know when a company lays off workers because it will send us a lease termination notice,” says Shamkumar. “The challenge is to fill the vacancy. There is a penalty for early termination of a tenancy agreement, but we are flexible on that point.”
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With companies being more budget-conscious, TS Management Services has had to adjust its rates to stay competitive. By being sensitive to the needs of his clients during the market downturn, Shamkumar hopes that they will reciprocate when the market recovers.
Despite the slowdown, process workers — mainly in the O&G engineering and support services — still make up 40% of the resident population at Tuas View, says Shamkumar. Workers in the O&M and manufacturing sectors account for about 30% each.
Since 2010, the Ministry of Manpower has also introduced measures to curb the growth of foreign workers in Singapore. These include hikes in the foreign worker levy; more stringent criteria for employment pass and mid-level skilled (S-Pass) qualifying salary; cuts in man-year entitlement for the construction sector; and a reduction in the dependency ratio ceilings for S-Pass in the manufacturing and services sectors.
The Tuas View Dormitory is one of Singapore’s biggest, with 20 four-storey blocks on a sprawling 8.4ha site on Tuas South Avenue 1 that overlooks the sea (Photo: Samuel Isaac Chua/EdgeProp Singapore)

Competing to fill beds

Compounding the problem of a slower growth rate in foreign workers and increased layoffs is the new supply of purpose-built workers’ dormitories that has sprung up.
Located on an 8.4ha site fronting the sea, Tuas View was Singapore’s biggest purpose-built foreign workers’ dormitory when it opened at end-August 2014. It has a total of 16,800 beds in 20 four-storey blocks in brightly painted hues.
But this year, that title of biggest dormitory in Singapore has been ceded to Sungei Tengah Lodge, a dormitory with a capacity of 25,000 that even boasts a cricket field among its amenities. In Tuas, two new workers’ dormitories opened earlier this year — the Tuas South Dormitory, with 9,200 beds, and the Tuas South Street 15 Dormitory, with 12,800 beds, bringing the total new supply to 22,000.
TS Management Services’ Shamkumar recognises how “cut-throat” the business has become. “We are all fighting for the same pool of foreign workers,” he points out. “If there are only 20,000 foreign workers in Tuas and close to 39,000 dormitory beds to fill, this is the result — a price war.”
Onshore Food’s Ganesh has already been approached by other dormitories in Tuas and Jurong offering lower rates to win him over. However, he intends to stick with Tuas View. “My workers are used to the place and are comfortable there,” he says. “So, I’m going to continue with the lease.”
The canteen at Tuas View (Photo: Samuel Isaac Chua/EdgeProp Singapore)

Differentiation through service

Shamkumar intends to differentiate Tuas View from the rest of the pack through its services and amenities. He will focus on retaining existing clients. “We take pride in ensuring that the workers’ welfare is taken care of — we make sure that the place is clean, that there are enough amenities to meet their needs and we are also open to suggestions on improvements,” he says.
Amenities in Tuas View include laundry service, two supermarkets, three remittance service providers, ATM machines, a barber shop and a medical and dental clinic. There is also a canteen, beer garden and communal cooking facility for those who prefer to cook their own meals. Recreational facilities include a 250-seat cinema, street soccer court, well-equipped gym, multi-purpose hall and billiard and pool room.
"We have everything,” says Shamkumar. “The guidance from JTC Corp when we were awarded the site was to provide an all-in-one housing and integrated solution so that workers returning from work would not need to go out again to get their necessities.”
During festive occasions, such as Chinese New Year, Hari Raya or Deepavali, the dormitory management organises activities for the workers. These events generally attract at least 5,000 attendees. The most recent was a Deepavali concert on Nov 6, featuring stars from India. It drew 7,000 attendees. “It’s quite a bit of cost,” says Shamkumar. “But I think we owe it to the workers.”
It took two years for Tuas View to stabilise and achieve the current occupancy rate of 83% — 14,000 out of a total 16,800 beds filled. “Occupancy is good, but the rates are not ideal,” laments Shamkumar.
Supermarkets at Tuas View Dormoitory (Photo: Samuel Isaac Chua/EdgeProp Singapore)

Origins

Shamkumar reckons the peak of the workers’ housing market was in 2011, when he first entered the business. A pilot with the Republic of Singapore Air Force for 15 years, he decided it was time to hang up his combat uniform and swap aerial manoeuvres for a more ground-based career.
His father, Subramani, introduced him to the business of operating workers’ dormitories when he was mulling over career options. “He was a pioneer in the business more than 30 years ago,” recounts 39-year-old Shamkumar. “Initially, employers housed their workers in makeshift housing or in containers at work sites.”
Subramani was involved in the development and management of the first few purpose-built workers’ dormitories in Singapore while he was working at Mini Environment Services, a company established in 1976 as a foreign labour supplier that ventured into the workers’ dormitory business in 1984. MES is still an established workers’ dormitory operator, with a total of 23,900 beds today.
However, the biggest purpose-built dormitory owner and operator today is Vobis Enterprise, a subsidiary of Aik Chuan Construction. It owns and operates eight workers’ dormitories across Singapore, with a total capacity of 39,500 beds. Another leading player is Westlite Dormitory, a subsidiary of Singapore Exchange-listed Centurion Corp, which owns and manages a portfolio of five workers’ dormitories in Singapore with a total capacity of 35,500 beds.
Instead of joining his father’s business, Shamkumar decided to start his own firm, TS Management Services. In 2011, one of his first projects was to manage a dormitory for 4,500 workers on Jurong Island for SK Engineering & Construction.
Indian stars were flown in to Tuas View for the Deepavali celebration

Stakeholders

Tuas View is the first project Shamkumar has undertaken as both co-owner and operator. TS Management Services has a 20% stake in joint venture (JV) company Active System Engineering, which won the site for the development of Singapore’s largest purpose-built workers’ dormitory in October 2012.
The biggest stakeholder in Active System Engineering, however, is SGX-listed builder and property developer Wee Hur Holdings. The company holds a 60% stake via its wholly-owned subsidiary Wee Hur Dormitory. Another 10% in the JV company is held by WM Pte Ltd, whose shareholders include Goh Yeow Lian, executive chairman and controlling shareholder of Wee Hur Holdings, along with his immediate family members. The remaining 10% stake is owned by Lucrum Capital, a private-equity group.
For Wee Hur Holdings and Lucrum Capital, this is the first time they are investing in a foreign workers’ dormitory. “We are happy that we are operating one of the biggest workers’ dormitories with good standards and that our workers are happy staying here,” Anthony Cheng, senior executive with Wee Hur Dormitory, says in an email response. “In terms of return on investment, however, it may not be so desirable.”
When the JV partners first tendered for the site four years ago, there were no dormitories of such a scale then, recounts Shamkumar. “And it is the only one on a short-term lease of 3+3 years,” he adds. “Most of the other dormitory sites up for tender were on smaller sites with leases of 3+3+3 years or 20 to 23 years.”
According to an announcement by Wee Hur Holdings in October 2012 upon being awarded the site, Active System Engineering has to pay a monthly rent of $1.16 million to JTC for the duration of the lease. The first three years of the lease has expired, and the second term of three years commenced earlier this month. For now, there is no option for another three-year extension on the site. This means that, at the end of the lease, the facility will be torn down, and the site returned to JTC.
“In view of its size and short lease tenure, we believed the government had projected an acute shortage in [purpose-built workers’ dormitories] and that this investment [would] be a viable one,” says Wee Hur’s Cheng.
The JV partners spent more than $60 million to build the facility at Tuas View. To finance the construction of the property, a bank loan of $34.7 million was secured. Based on a straight-line amortisation of the property over a six-year period, the monthly cost translates to $833,333.
According to Shamkumar, the monthly operating cost per worker is about $50. Based on the current resident population of 14,000, that translates to a monthly operating cost of $700,000. This, however, does not include the cost of wear and tear, which is “very high”, given the turnover of some 8,000 workers over the past two years, he points out.
After taking into consideration the land rent ($1.16 million), amortisation of the property ($833,000), interest repayment of $500,000 on the loan and operating cost of $700,000, the monthly break-even point is estimated to be close to $3.2 million. Assuming an average monthly rent of $250 a worker, total rental revenue is $3.5 million a month, based on the current resident population of 14,000.
While operationally profitable now, the return on investment “is not as lucrative as we had initially projected”, concedes Shamkumar. “The economic slowdown is against us, not to mention the new supply of purpose-built workers’ dormitories in the area. Fortunately, our JV partners are financially strong, so we will be able to weather the storm.”
The street soccer court

Ramping up occupancy

Shamkumar is targeting to drive occupancy rate to at least 95% over the next three years. One consolation is that the government will not be releasing any more sites for new purpose- built workers’ dormitories for now, he says.
The number of purpose-built workers’ dormitories listed on the Ministry of Manpower’s website is 54, with an aggregate of close to 250,000 beds. They are all licensed dormitories with more than 1,000 beds each.
There are another 1,000 operators of factory-converted dormitories in Singapore that house about 80,000 workers. Dormitories with fewer than 1,000 beds need not be licensed yet. Consequently, there are many unlicensed as well as “illegal” workers’ dormitories, says Shamkumar. “Examples include those that house workers even when they are not authorised to do so, or they house more workers than they are allowed to.”
Despite the stiff competition and the ongoing price war, he intends to retain his clients by maintaining the level of services and amenities provided at Tuas View. “It does not matter what the other dormitories are providing,” he says. “We have a service standard that we want to uphold.”
This article appeared in The Edge Property Pullout, Issue 755 (Nov 21, 2016) of The Edge Singapore.