http://www.businesstimes.com.sg/arch...dustrial-space

Published June 06, 2012

Bubble alert: Watch this (industrial) space

Investors rush in, seeking huge rentals, but big supply in pipeline may hit yields

By Felda Chay


[SINGAPORE] A sudden rush for industrial properties and the high value investors are placing on them have alarmed some market players. They wonder if these investors know what they are getting into.

Experts warn that the returns from rentals expected by these investors - many of whom are new to the industrial property market - may not pan out. There is also a huge supply of factory and warehouse space in the pipeline. This may lead to a shortage of tenants and hit rentals in a few years' time.

Rental yields have already come down, as industrial property prices have moved up more than rents, said Chua Chor Hoon, DTZ's head of Asia-Pacific research.

The industrial price index rose 26 per cent in the first quarter from a year ago, outpacing the 10.6 per cent increase in the rental index over the same period.

Yet, some marketing agents have been asking for rents that are more than double the market rate, observed Savills Singapore's director of research & consultancy, Alan Cheong.

"They are not targeting the true-blue industrial users, but quasi office users," he said.

"You see some agents touting industrial space as Grade A office space. Some are asking for rents between $4 and $6 per square foot (for space meant for light industrial use)," said Mr Cheong. "Some industrial buildings even have the look and feel of an office building."

Typically, rents for light industrial space, classified B1, fall between $1.80 and $2 psf, said Mr Cheong.

Owners of industrial space who are expecting high rents by leasing to retail or office users are opening themselves up to enforcement action from the Urban Redevelopment Authority (URA), said DTZ's Ms Chua.

Should URA come down on them, there will be "an impact on the rental yield as unauthorised uses usually pay better rents", she noted. Already, National Development Minister Khaw Boon Wan has indicated on his blog that the government will keep a tighter rein on how industrial property is used.

Then there is the huge supply of factory and warehouse space in the pipeline to consider.

URA's April data shows that by 2015, as much as 3,696,000 square metres of factory space will come onto the market - representing 12 per cent of current completed space. For warehouses, the supply pipeline is 1,192,000 sq m - or 17 per cent of current completed space. This means that end users have plenty to choose from.

But marketing agents with little expertise in the industrial sector could cajole the new investors into making ill-informed purchasing decisions.

"The industrial market has never been so speculative before," said Tricia Teo, executive director at SLP International Property Consultants.

This speculative streak comes at a dangerous time. The eurozone crisis and the struggling economy have spread jitters worldwide. This could also hit the industrial space sector.

"Office and industrial are business space - so demand expands and contracts with economic ups and downs. Tenants may pre-terminate or fold up," said DTZ's Ms Chua.

The worry is also that there may now be weak holders of strata title units who may panic and dump if there is a crisis, added Savills' Mr Cheong.

"So the market is in a slightly precarious position where a slight drop in confidence can cause weak holders to bolt for the door. The conditions are there, you just need a spark," he said.

The government has moved in to put a lid on prices and weed out speculative investor demand. Since the start of the year, a rule prohibits new developments from being subdivided into strata units within 10 years from the issue of the temporary occupation permit (TOP). The rule applies to selected sites near MRT stations, and those decided by the government.

And given that "shoebox" industrial units have accounted for much of the sales and price jumps, there is also a rule stating that the minimum size of new strata-titled units, and units in multi-user industrial developments, must be 1,615 sq ft (150 sq m) - said to be the minimum size needed for genuine industrial activity.

"This will limit the stock of shoebox industrial space going forward and ensure that the building specifications of industrial projects are catered to industrial users," said Colliers International's director of research and advisory, Chia Siew Chuin.

The new rules could therefore help to moderate prices and rental expectations, said Savills' Mr Cheong.

"But it takes time to complete an industrial property - say, 2-3 years. Meanwhile, the shoebox units are coming up. The new rules will therefore take time to take effect," he said.

Based on caveats recorded by URA's Realis, 462 or about 50 per cent out of the 920 transactions from January to May 2012 were units measuring below 150 sq m, noted Colliers' Ms Chia. In 2011, some 37 per cent of the 2,239 caveats recorded by URA were smaller than 150 sq m.

For now, industrial property prices show no sign of abating. At the freehold AZ@Paya Lebar developed by Ascendas, for instance, the average launch price was between $1,000 and $1,100 psf - a record high. Average sizes of units at the development, expected to obtain TOP in the first quarter of 2014, range from 979 to 2,497 sq ft.

Another freehold development, Arcsphere@Alju-nied, saw prices range between $950 and $980 psf.