Industrial properties run into headwinds

Large supply of factory space is expected to depress rents at facilities

Singapore’s industrial properties seem to be nearing the end of their strong run with growth in rents and capital values starting to taper off as worries over a supply glut grow.

Back in 2011, industrial rents and capital values produced a stellar report card, with the URA (Urban Redevelopment Authority) reporting a 16 per cent to 22 per cent jump in multi-user and warehouse price and rental indices, respectively, as rents and prices reached multi-year highs.

However, going into the Dragon Year, consultants and analysts predict softer or flat rental growth for factories, warehouses, high-specifications industrial buildings and business park properties due to oncoming supply pressure.

In fact, there is a net floor area of 9.59 million square feet (sq ft) of industrial space in the pipeline for 2012, with around 66 per cent expected to be factory space, said Colliers International Singapore Research.

The large supply of factory space, in particular, is expected to depress rents at facilities island-wide after a steady climb to recent highs on the back of robust manufacturing growth.

That said, with the dimmer outlook for the manufacturing sector now, Colliers director Chia Siew Chuin expects overall demand for space to fall.

Said Ms Chia: ‘Given the intrinsic link between the performance of Singapore’s industrial property market and that of the manufacturing sector, the weakening manufacturing sector (excluding biomedical) would likely have a bearing on Singapore’s industrial property market growth’.

Echoing the same tune, Derek Tan from DBS Vickers Research said: ‘While the industrial segment has benefited from the strong rebound in economic activity and manufacturing growth especially post-GFC (great financial crisis), the deteriorating global growth outlook in 2012, arising from the weakening economies in Europe and supply chain disruption in Thailand, is likely to dampen demand for industrial space given its close correlation with industrial output.’

Credo Real Estate executive director Ong Teck Hui agreed that the sector’s rents could face downward pressure and slide by an average of 15 per cent in 2012 as demand softens for both existing industrial space and new completions.

Cracks are also starting to show, with increasingly subdued bid prices and participation levels at industrial tenders and other sales events, suggesting growing caution among developers.

For instance, an industrial government land parcel located in Woodlands drew only four bidders and a top bid of $72 million or $142 per square foot per plot ratio (psf ppr) back in September, which was lower than the $152 psf ppr for a nearby site that attracted nine contenders a few months earlier.

Among industrial properties, the worst hit by the weakening sentiment appear to be high-specs buildings and business parks, because of their greater international exposure and worries of a vacancy overhang.

The Ministry of Trade and Industry’s (MTI) latest Industrial Government Land Sales Programme (IGLS) is also expected to further depress sentiment in the sector.

The IGLS will release more sites to meet future demand as well as pull the brakes on the industrial market. In particular, smaller configuration sites with shorter tenures have been released for the first half of the year.

In addition to all that, to better cater to industrialists’ needs for ready built industrial space, MTI also introduced a new set of conditions on all B1 and B2 IGLS parcels, which came into force on Jan 1, 2012.

One of the new conditions include developers not being allowed to strata sub-divide the development on selected sites in the first 10 years after completing the project.

Lee Sze Teck, senior manager of research and consultancy at DWG, said: ‘ The flip side of this policy is that it favours developers who build and hold industrial developments for recurring income but disadvantages those who build and sell. This will put a cap on the final tender price for such developments as the developer is bearing more risk for ten years. But in doing so, the government is hoping that rental costs will be lowered for industrialists.’

In terms of capital values, at least three consultants expect the recently imposed additional buyer’s stamp duty for the residential sector to be a boon to industrial properties. Funds may be diverted away from residential to industrial assets, providing support for the capital values of multi-user factory space and high-specs buildings in particular.

Jones Lang LaSalle noted: ‘High-tech properties with good-quality building specifications and tenants with good covenant strength are likely to continue to attract investors, creating opportunities for industrial investments beyond the current period of economic uncertainty.’

Having said that, most analysts and consultants concur that there is no escaping the effect of weaker Western economies going forward.

Said DBS Vicker’s Mr Tan: ‘Looking ahead, moderating global PMI (Purchasing Managers Index) figures and slowing manufacturing growth are expected to put a cap on further rental growth, as tenants rationalise their space requirements as production levels fall to below optimal capacity.’