Industrialists Are Expected to Stay Cost Sensitive and Exercise Prudence for 2H 2015

2015-07-08

International property consultancy, Colliers International’s latest quarterly report on the industrial property sector revealed signs of a possible pick-up in the number of leasing deals, but the strata-titled sales market remained anaemic in 2Q 2015.  

Leasing Market 

According to the rental records by URA’s REALIS as of 1 July 2015, the total number of leasing deals – including warehouse, factory and business park premises – had increased from 651 in March 2015 to 756 in April 2015, to 836 in May 2015. 

The encouraging pick-up in the number of leasing deals was due to the sustained interest from firms in growth industries – such as data centres and businesses in the manufacturing chain of high-technology products. Some industrialists, who were affected by the Government’s industrial estate redevelopment plans, were also understandably sourcing for alternative premises. 

Nonetheless, the quarter saw minimal rental movements of between -1 per cent and 1 per cent across the various types of industrial premises.  This is on the back of landlords generally maintaining realistic rental expectations, as the overall competition for qualifying tenants remained stiff and industrialists stayed cost sensitive. 

For prime conventional factory space, rents eased in 2Q 2015 on the back of supply concerns.  The average monthly gross rents of ground-  and upper-level space stood at S$2.52 per sq ft and S$2.04 per sq ft in 2Q 2015, after slipping by 0.4 per cent and 1 per cent quarter-on-quarter (QoQ), respectively. 

For prime conventional warehouse space, the average monthly gross rents of ground-level space held steady at S$2.49 per sq ft in 2Q 2015.  In contrast, that of upper-level space eased by another 1 per cent QoQ to S$1.92 per sq ft. 

Over at the business park category, after rising for the past 2 quarters, the average monthly gross rent remained unchanged at S$4.17 per sq ft in 2Q 2015.  This came amid differing rental expectations between landlords of newer and older developments, depending on variables such as the building’s location, occupancy levels and attributes.  

For independent high-specifications (high-specs) industrial developments, of which new multi-user supply is limited, the average monthly gross rents for ground- and upper-level space registered marginal quarterly increases of 0.3 per cent and 0.6 per cent to reach S$3.31 per sq ft and S$3.13 per sq ft, respectively. 

Sales Market 

Sales of strata-titled industrial properties continued to languish in 2Q 2015, as the weak buying sentiment extended into another quarter. 

Preliminary caveat records from the URA REALIS as of 1 July 2015 showed the number of caveats lodged falling from 220 in 1Q 2015 to 206 in 2Q 2015.  

By and large, the combination of the Total Debt Servicing Ratio requirement that has crippled buyers’ purchasing power, the ongoing pricing disagreement between buyers and sellers, jitters over an impending interest rate hike and buyers’ anticipation of a future price correction remained among the key factors that weighed down on sales activity during the quarter. 

Mr Tan Boon Leong (陈文龙), Executive Director of Industrial Services, says, “The poor buying sentiment, coupled with the heightened competition from sellers looking to offload their industrial units in the secondary market, also continued to pose challenges for developers, who were looking for an opportune time to release units in new strata-titled industrial developments for sale in 2Q 2015.

Consequently, with most developers staying focused on clearing the unsold inventory in already-released projects, only one new strata-titled industrial project made its debut during the quarter.” 

The 229-unit Proxima@Gambas, which has a 30-year leasehold tenure, saw selected units being released for sale in late June at prices starting from S$225 per sq ft.  

Mr Tan adds, “It was observed that in the prime freehold conventional industrial property segment, where supply remains limited, most sellers showed the ability to hold on to their pricing expectations during the quarter. This is despite the diminishing pool of prospective buyers.” 

Consequently, the average capital value of ground-level prime freehold conventional factory space stood still at S$863 per sq ft in 2Q 2015, unchanged for the 4th consecutive quarter.  That of upper-level space maintained at S$735 per sq ft during the quarter, after easing slightly in the preceding quarter. 

Similarly, the average capital values for both ground- and upper-level prime freehold conventional warehouse space stayed flat for the 6th consecutive quarter in 2Q 2015 at S$661 per sq ft and S$587 per sq ft, respectively.

Outlook

Ms Chia Siew Chuin (谢岫君), Director of Research & Advisory, says, “Looking into 2H 2015, the industrial property market is expected to remain in a quiet state similar to that in 1H 2015. Market sentiment is expected to stay tentative, as the prevailing uncertainties surrounding the global economic outlook and the possible increase in interest rates are anticipated to linger. 

Most industrialists are expected to stay cost sensitive and exercise prudence on their real estate requirements in 2H 2015 – given the availability of ample choices on the purchase and rental fronts.” 

Rents of prime multi-user conventional industrial space are likely to ease further and possibly correct by up to 2 per cent over the next 6 months. For business parks and independent high-specs industrial premises, where supply is expected to remain tight for the rest of 2015, rents could register a marginal increase of up to 1 per cent over the same period. 

As for the strata-titled industrial sales segment, overall transaction volume is projected to stay subdued in 2H 2015, unless the price expectation gap between buyers and sellers can be narrowed.  

Given the poor buying interest, easing rents and possible interest rate hike, sellers with weaker holding power may be inclined to lower their price expectations.  This could place some downward pressure on overall industrial prices for 2H 2015.