2014-07-10

A Mixed Outlook on the Industrial Property Sector for 2H 2014

The latest quarterly report by Colliers International revealed that leasing activities in the industrial property market continued to gain momentum in 2Q 2014, but sales remained weak. 

Leasing Market 

In tandem with the continued improvement in business sentiment among manufacturers, the number of leasing enquiries – particularly for industrial space zoned for “Business 2” use – continued to increase in 2Q 2014.  The sustained interest stemmed from firms in the growth industries such as the clean technology, oil and gas, as well as the info-communications sectors.  

Ms Brenda Ong (王俐频), Executive Director of Industrial Services | Project & Leasing, says, “We observed that there was a slight pick-up in the number of committed leasing deals during 2Q 2014, driven mainly by renewals, as well as some relocation and consolidation activities.”  

Ms Ong continues, “In general, landlords were realistic in their rental expectations, as they were mindful of both tenants’ continued cost-conscious stance and the heightened competition for tenants who could qualify for industrial space.  

The competition came from the recent completion of new strata-titled multi-user industrial developments – including AZ @ Paya Lebar, Novelty BizCentre along Howard Road, M-Space in Mandai and Oxley Bizhub in Ubi.” 

The quarter saw a mixed performance in rents across the different industrial segments. 

In 2Q 2014, rents of conventional prime warehouse space weakened for the third straight quarter – amid competition from newer and better specification premises, such as ramp-up industrial developments.  The average monthly gross rents of ground- and upper-floor warehouse space recorded quarterly declines of 1.6 per cent and 2.4 per cent to S$2.54 per sq ft and S$2.04 per sq ft, respectively. 

In contrast, the average monthly gross rents of prime conventional factory space recorded an increase of 2.8 per cent quarter-on-quarter (QoQ) at S$2.55 per sq ft for ground-floor space and 0.5 per cent QoQ at S$2.14 per sq ft for upper-floor space.   This was achieved as a result of the inclusion of a newly-completed development to the portfolio of properties tracked by Colliers International1.  

Meanwhile, supported by a pick-up in leasing demand and a limited supply in the pipeline, rents of independent high-specifications (high-specs) industrial space remained relatively stable in 2Q 2014, after easing for the past three consecutive quarters.  

In 2Q 2014, the average monthly gross rent of high-specs ground-floor space remained unchanged at S$3.20 per sq ft, while the upper-floor rents inched up 0.3 per cent to S$2.95 per sq ft. 

The business park space segment recorded a marginal 0.7 per cent QoQ increase in rents to S$4.08 per sq ft in 2Q 2014.  The increase was boosted by the higher rents attainable for newer developments, and supported by the gradual absorption of available multi-user business park space – given that new supply is expected to be limited for the rest of 2014 and 2015. 

IndustrialSpaceRents-2Q2014

Sales Market

The strata-titled industrial sales sector remained subdued in 2Q 2014 – with transaction volume still suffering the repercussions from the implementation of the Total Debt Servicing Ratio (TDSR).  

Mr Tan Boon Leong (陈文龙), Executive Director of Industrial Services | Project & Sales, says, “The release of units in seven new industrial developments during the quarter, up from just two in 1Q 2014, did not help to lift the overall sales – on the back that buyers were still adopting a cautious and selective buying stance.”  

The seven developments included HH @ Kallang (Kallang Pudding), Carros Centre (Jalan Lam Huat), T99 (Tuas South), West Star (Tuas Bay Close), West View Food Factory (Tuas Bay Walk), Loyang Enterprise Building (Loyang Way) and Nordcom I (Gambas).

Mr Tan continues, “Prospective buyers – especially those who disagree with sellers’ prevailing price expectations – were in no hurry to lock in their purchases.  This is due to the ample choices in the market and interest rates, though creeping upwards, are still expected to remain low for the time being.  In fact, there were some buyers who were anticipating a price correction.” 

Nonetheless, the muted sales volume in 2Q 2014 did not place downward pressure on the average capital values of prime freehold conventional industrial space.  

The average capital values of prime freehold warehouse space maintained at the past two quarters’ level of S$661 per sq ft and S$587 per sq ft for ground- and upper-floor space, respectively, in 2Q 2014.  Meanwhile, the average capital values of ground- and upper-floor space for prime freehold conventional factory space were S$863 per sq ft and S$736 per sq ft, respectively.  

CapitalValuesIndustrialSpace-2Q2014

Mr Tan comments, “The price resilience is due to the scarcity of such freehold industrial developments, given the Government’s mandate to release only industrial sites with a maximum tenure of 30 years.  This leads to sellers of both new and old properties to generally hold onto their price expectations.” 

Outlook 

Looking forward, the outlook for the industrial property market is expected to be mixed for the rest of 2014.

The leasing market is expected to continue to experience healthy activity levels – in terms of both enquiries and committed deals over the next six months.  This is supported by the generally-better economic sentiments and Singapore’s appeal as a regional headquarter base, as well as a research and development hub for firms looking to grow their footprint in the region. 

Ms Chia Siew Chuin (谢岫君), Director of Research & Advisory at Colliers International, says, “Industrialists, in general, are still expected to be cost conscious.  On the back of the completion of more strata-titled industrial developments, which would result in an increase in competition for tenants, rents of prime conventional space are expected to ease by up to two per cent in 2H 2014 from the level recorded in June 2014.

However, rents for both independent high-specs and business park space are expected to remain stable in 2H 2014 – given the gradual absorption of the available space, in view of the limited supply in the pipeline for 2H 2014 and 2015.” 

Over at the sales market, for 2H 2014, the average capital values of prime freehold conventional industrial space are likely to hold steady, as sellers are generally expected to still hold onto their price expectations due to the scarcity of properties with a long tenure.  Transaction volume would continue to remain low, as long as there is a price standoff between buyers and sellers. 

Ms Chia concludes, “Developers are likely to continue to selectively release units in their new developments for sale, as it would be to their advantage to do so earlier than later – given the increasing competition for buyers. 

What this also means for the developers is that more effort would have to be devoted to the design of the industrial developments – to ensure that the functional space requirements of the targeted end-users or industrialists are met.  Plus, projects have to be competitively priced, bearing in mind the continued effects of the TDSR.” 

1. Without taking into account the newly-added development into the representative basket of buildings tracked by Colliers International, rents of prime conventional factory premises were relatively stable – with ground-floor rents maintaining at the previous quarter’s level and upper-floor rents easing by 0.5 per cent QoQ during the quarter.