Published December 31, 2012

Slower rise in industrial property prices seen

More can be done to meet needs of industrialists, say market watchers

By Mindy Tan

[SINGAPORE] Even as the government has made a concerted effort to meet the needs of genuine industrialists, more can be done, say market watchers.

"The government can consider expanding the list of allowable uses in industrial premises to include the function under the various stages of a product life cycle, and relook the 60/40 quantum control," suggested Tan Boon Leong, executive director of industrial services at Colliers International. "If a business is involved at any point of the product life cycle, it can qualify to be located in an industrial building."

Currently, single-user industrial/warehouse/utili-ties/telecommunication developments that are intended for use by a single occupier are subject to a 60/40 quantum control, where a minimum of 60 per cent of the gross floor area (GFA) must be dedicated to the predominant use, while a maximum of 40 per cent of the GFA can be dedicated to ancillary and secondary uses.

Thus, owners of these single-user developments are allowed to sub-lease part of their premises to a different operator for a short duration - provided they can comply with the 60/40 quantum control for the entire development - to give landowners flexibility to respond to market changes.

Despite such provisions, industrial properties have been in the limelight this year as prices continued to reach new peaks and small and medium enterprises (SMEs) grew increasingly vocal about high rents.

This is despite a range of measures rolled out to try and rein in prices.

Based on URA's industrial property price index, industrial property prices jumped 26.7 per cent in the first three quarters of 2012 while rentals rose 6 per cent in the same period, said Lee Sze Teck, senior manager, training, research and consultancy, at DWG.

"Comparatively price increases in the strata industrial market are much more than in the private residential market, which has edged up only one per cent in the first nine months of 2012," he said.

According to data provided by Colliers International, the average capital values of ground and upper floor prime freehold conventional factory space hit $699 per square foot and $636 psf respectively as of Q3 2012 after rising by 15.7 per cent and 19.5 per cent respectively in the first nine months of 2012.

"This was a stronger pace of growth compared to the 10.8 per cent and 14.9 per cent increases recorded for ground and upper floor space respectively for the whole of 2011," said Colliers's Mr Tan.

For prime freehold conventional warehouse space, ground and upper floor space commanded an average value of $632 psf and $557 psf respectively as at Q3 2012, after registering growth of 8.4 per cent and 10.1 per cent respectively over the first nine months of 2012.

This was a slower rate of increase compared to the 13.4 per cent and 16.6 per cent growth registered for ground and upper floor space respectively in the first nine months of 2011.

This is despite measures being rolled out which include the shortening of the land tenure from 60 years to a maximum of 30 years for sites released under the Industrial Government Land Sales programme in the second half of 2012, and the prohibition of strata-subdivision of selected sites for a period of 10 years from the date of issue of TOP. In addition, single units in multi-user industrial developments cannot be less than 150 sq metres.

Said DWG's Mr Lee: "These measures have little immediate impact on the industrial market as evidenced by the continued sharp rise in industrial prices in 2012."

"The objective of shortening the tenure of GLS sites is to make land more affordable so that industrialists can buy them and custom-build their own facilities," said Chua Chor Hoon, DTZ head of APAC research. "However, this will not be achieved if developers bid for these sites and then strata-subdivide them to sell to buyers which will include investors who are willing to pay more than end-users."

"The problem arises when new developments are built to enable them to be sold easily to investors rather than built to meet industrialists' demands. Then there could be supply and demand imbalance eventually, which will drive rents up for space that meets industrialists' needs, while those that do not meet their needs end up with unauthorised uses or, worse still, vacant," she said.

Investors have been driven to industrial properties after being deterred by cooling measures - including the additional buyer's stamp duty (ABSD) introduced in December last year and a cap on home loan tenures announced in October - in the residential market.

"Purchases by both local and foreign investors have increased in 2012," said DTZ's Ms Chua. "Industrialists who can afford to buy their own premises have also been active, so that they can have better oversight of their business costs and not be subject to rental fluctuations. This could explain why the purchases of factories by companies increased the most year-to- date in 2012."

Transactions of all types of factories, proxied by caveats lodged, increased by about 10 per cent from 2,871 units last year to 3,160 units in 2012 (based on caveats downloaded on Dec 10).

While the proportion of purchases of factories by companies accounted for about 70 per cent of transactions in both 2011 and 2012, purchases by companies increased the most in 2012 - by 10.5 per cent on a year-on-year basis.

By comparison, purchases of factories by local and foreign individuals grew by a smaller 9.4 per cent and 6.7 per cent respectively year-on-year.

Said Lee Lay Keng, DTZ's associate director of research: "The labour tightening policies and productivity drive to increase wages could see more industrialists relocating their businesses out of Singapore to reduce operating costs or cutting back on expansion due to difficulties in recruiting staff. In addition, 2013 will see a higher-than-average pipeline supply of industrial space.

"However, against the backdrop of slow but still positive economic growth, we expect industrial rents to hold firm or ease slightly next year. Meanwhile, ample liquidity will continue to nudge investors towards the industrial sector, barring any government cooling measures, but the price growth is expected to decelerate as prices have already risen between 28 and 45 per cent since the last trough in 2009."

An annual average of 9.5 million sq ft of industrial space is expected to be completed between 2013 and 2016. While this is not excessive compared to the past 10-year annual average supply of about 10 million sq ft, the pipeline supply is not even, and about 16 million sq ft of space is expected to be completed next year, said DTZ.

"Knight Frank envisages that the current rate of price hike is unlikely to be sustainable as end-users will eventually be priced out when faced with the double whammy of higher occupancy cost and labour cost. The cautious economic outlook, lower new orders and ample supply will slow future price appreciation," said Png Poh Soon, head of research at Knight Frank Singapore.

"For 2013, prices for industrial properties are likely to continue to increase, albeit at a slower pace compared to 2011 and 2012," added Mr Png.

He also expects prices of attractive industrial properties in good locations and with superior building specifications and longer land tenures to rise by 10-15 per cent for the full year of 2013.

"Rentals are also expected to increase, but at a slower pace of between 3 and 5 per cent," Mr Png said.

Beyond rolling out measures, plans are also in the works to introduce two new complexes - Bedok Food City and Defu Industrial Park - which will house the food industry and general industries respectively.

Construction of both the Bedok Food City and Defu Industrial City will begin in 2015 and is expected to be completed by mid-2017.