2013-04-08

An Increase in Leasing Enquiries; Deals are Mainly Lease Renewals in 1Q 2014

The latest quarterly report by Colliers International revealed that the industrial property sector in Singapore started 2014 on a stable footing – supported to some extent by the pick-up in business sentiment among manufacturers, on the back of improved global macro-economic conditions. 

Leasing Market 

It was observed that leasing enquiries had increased in 1Q 2014, particularly for industrial space that is zoned for “Business 2”  use.  Market interest has generally stemmed from manufacturing companies from the oil and gas industry, as well as info-communications companies such as data centre service providers. 

However, the overall level of leasing transactions stayed subdued during the period, with most being lease renewals. 

Ms Brenda Ong (王俐频), Executive Director of Industrial Services | Project & Leasing, says, “The first quarter of the year saw tenants opting to renew their leases over relocating.  Firms appeared to be channeling resources towards driving productivity instead of business expansion, taking heed from the Government to increase productivity amid a tight labour market.  

The drive to reduce costs has also, in some instances, led to the relinquishing of space – such as Barclays which has announced that it would be giving up its space at Eightrium at Changi Business Park as part of its cost cutting measures.” 

The low level of leasing transactions during the quarter could be attributed to the typically-slower activities due to the Lunar New Year festivities, the longer leasing process arising from the need to ensure that prospective tenants comply with the Government’s list of qualifying industrial space users, as well as tenants’ tight rein on costs, which, in some cases, lengthened the time needed to source and commit to space. 

In light of the above, landlords – especially those with older premises or buildings with higher vacancies – were generally realistic in their rental expectations in 1Q 2014.  The increased level of competition for qualified tenants, particularly from newly-completed developments, has also reined in rental growth. 

Consequently, rents across all categories of industrial space remained relatively stable in 1Q 2014.  

The quarter registered an addition of 331,688 sq ft of new multi-user business park space from Nucleos in one-north.  Average island-wide monthly gross rents in the business park space segment had held firm at the preceding quarter’s level of S$4.05 per sq ft in 1Q 2014.  This was supported by the higher rents that could reasonably be achieved for newer and recently-refurbished business park developments. 

Ms Ong comments, “This is the third consecutive quarter that the independent high-specs segment registered a rental decline, reflecting that leasing activities in this segment continue to be impacted by the stringent requirements to qualify prospective tenants. 

Meanwhile, although the prime conventional factory and warehouse segments also recorded moderate rental declines, rents for these two segments are more than 30 per cent higher than their respective troughs seen in 2009.” 

Sales Market

In general, the average capital values of prime freehold conventional industrial space was also stable in 1Q 2014.  

Specifically, the average capital values of prime freehold warehouse space, which are limited in supply, remained unchanged at S$661 per sq ft and S$587 per sq ft for ground- and upper-floor premises, respectively, after increasing for the past 7 consecutive quarters. 

Meanwhile, the average capital value of prime ground-floor freehold conventional factory space held steady at last quarter’s S$715 per sq ft in 1Q 2014, after easing in the preceding six months.  The average capital value of upper-floor premises, however, fell for the third consecutive quarter to reach S$655 per sq ft. 

Mr Tan Boon Leong (陈文龙), Executive Director of Industrial Services | Project & Sales, says, “The number of caveats lodged in the Real Estate Information System by the Urban Redevelopment Authority  fell for the third consecutive quarter from 739 in 2Q 2013 to just 216 in 1Q 2014. 

Despite the continued dwindle in sales in 1Q 2014, capital values generally still held firm because sellers – particularly those with properties of longer leasehold tenure or higher occupancies – are holding onto their expected prices.  Buyers, on the other hand, are expecting lower prices, with some deferring acquisition plans in anticipation of a future price correction.”  

The price standoff between buyers and sellers – amid the traditional slowdown in market activity during the Lunar New Year period, as well as the continued effects of the Total Debt Servicing Ratio framework – contributed to the overall decline in sales activity in the strata-titled industrial sales market in 1Q 2014. 

This was further compounded by the dearth of new strata-titled industrial launches in 1Q 2014.  There were only two major new strata-titled industrial projects launched during the period – the 383-unit West Connect Building at Buroh Street, which was priced at more than S$200 per sq ft, and The Index, a 98-unit ramp-up industrial development in Tuas, which was priced at an average of  more than S$300 per sq ft.

Outlook 

Looking forward, there are encouraging signs of a possible pick-up in leasing activity in the coming quarters, as the increase in leasing enquiries in 1Q 2014 could potentially translate into new leasing deals.  

Nonetheless, given the significant amount of supply in the pipeline – more than 27 million sq ft expected in 2014, industrialists are expected to continue to adopt a cost conscious attitude, which could exert some downward pressure on the average occupancy rate and rents. 

Ms Chia Siew Chuin (谢岫君), Director of Research & Advisory at Colliers International, says, “For the whole of 2014, rents of independent high-specs space could soften by up to 3 per cent, while prime conventional industrial space could experience a full year rental correction of up to 6 per cent.  

The only exception is the business park segment, where rents, on an islandwide basis, are still projected to hold relatively steady in 2014.  This is on the basis that any downward rental pressure on older premises and developments with higher vacancies would likely be mitigated by the higher achievable rents for newer and recently renovated business park developments.” 

For the strata-titled industrial sales segment, sales could also potentially pick up.  This is in view that sellers with weaker holding power or those who face difficulty in securing a tenant would eventually have to lower their prices or put their properties up for sale – especially with interest rates creeping upwards. 

Ms Chia comments, “Following the Government’s affirmation that there would not be any adjustment or removal of any existing measures in the near future, developers are likely to selectively start releasing units in their new industrial developments for sale over the next few quarters.  Those with unsold units from earlier project launches could show greater willingness to negotiate on the price to move sales.”

She adds, “However, given that most of the new upcoming projects will be developed on 30-year leasehold sites, sellers who are holding on to properties with longer tenure will have the tendency to hold on to their expected prices – given the scarcity of such properties.  

As such, for the whole of 2014, any decline in the average capital values of prime freehold conventional industrial space is expected to be capped at 5 per cent.”