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OUTLOOK 2015: INDUSTRIAL PROPERTY

Soft market ahead for most developers

But high-spec buildings, business parks that support high-end manufacturing will do fine

By Lee Meixian

[email protected]@LeeMeixianBT

29 Dec


A WEAKER manufacturing outlook and continued targeted measures by JTC Corporation to boost supply and cool speculation are likely to keep Singapore's industrial property market soft going into 2015 (see infographic).

Certain types of properties, such as high-specification factories, business parks and warehouses, as well as niche developments such as food factories, will probably still see strong take-up and stable rents.

This is because of their limited supply and links to high productivity and value-add economic clusters such as biomedical and petrochemicals.

The capital values of freehold and longer-tenure (from 60 to 999 years) factories will also be preserved, thanks to their growing scarcity amid a recent proliferation of 20-odd-year leasehold industrial project launches.

But it is the multi-user factories and ready-built factories - which tend to house traditional "sunset industry" manufacturers and small and medium-size enterprises - that will suffer.

This is especially so for those that cater to local or small regional demand and are manpower-reliant, as they will continue to be crimped by foreign hiring restrictions, said Desmond Sim, CBRE research head for South-east Asia.

To aggravate matters, a huge supply of 2.6 million square metres of factory space is expected to be completed in 2015, which should lead to falling rents.

Industrial real estate has performed patchily this year. Transactions fell by half from about 2,300 worth S$5.3 billion in the first 11 months of 2013, to about 1,100 worth S$2.6 billion, Urban Redevelopment Authority data shows.

This is primarily due to a sharp drop in strata-titled transactions. Loan curbs, seller stamp duties and a minimum occupation period introduced in 2013 have reduced investment activity. An expected interest rate increase next year further discourages mortgage borrowers.

Meanwhile, capital values have moderated and rentals have fallen, JTC data shows. Industrial rentals have eased 1.3 per cent year on year as at the end of the third quarter, while prices have inched up 0.2 per cent (versus a 3.2 per cent rise in 2013).

"Prices," said DTZ South-east Asia chief operating officer Ong Choon Fah, "tend to be stickier on the down cycle than on the up cycle."

SLP International executive director Nicholas Mak added that developers are usually reluctant to adjust the prices of their launched projects downwards, especially if they had bought the land at high prices. They may offer promotions such as rebates and rental guarantees to attract buyers instead.

Nevertheless, Colliers director for research and advisory Chia Siew Chuin said that industrial property prices could drop by up to 3 per cent.

Vacancy at both multiple-user and single-user factory space have risen incrementally this year, standing at 13.2 per cent and 6.8 per cent respectively in Q3 - and are expected to keep rising.

The opposite is happening at business parks. Analysts expect business park space to be filled by more companies seeking a reprieve from rising office rents in the Central Business District by moving their back-end offices to business parks. Meanwhile, booming e-commerce will also keep warehouse storage space in demand.

Land prices, too, have started to come down this year. An analysis done by SLP found that winning bids for single-user plots at Tuas South have fallen more than 10 per cent year on year, while those for larger plots that can be developed into multi-user factories have fallen more than 30 per cent.

This analysis did not control for plot sizes, locations, or tenures which have been capped at 30 years from July 2012 to help industrialists better manage their capital outlay.

Mr Mak said: "It seems like some developers are facing fatigue and growing cautious. Especially if they have a substantial land bank, they would be even more concerned with the challenges of selling the projects that they build."

Manufacturing has grown a rather subdued 3 per cent for the first 11 months of 2014 (or 1.4 per cent excluding the volatile biomedical sector), and will probably show a very mixed picture in 2015. Economists are looking at either a slight slowdown or a "very measured" and "not at all spectacular" pick-up.

The weakness in the eurozone economies is one threat, because the Europeans import many of Singapore's pharmaceutical goods. Worldwide demand for semiconductor products, going by the book-to-bill ratio, is also going to be weak, said UOB economist Francis Tan. Pharmaceuticals and semiconductors make up 15 per cent and 20 per cent, respectively, of Singapore's manufacturing output.

Meanwhile, China's growth is expected to slow, though not sharply. Its flash HSBC/Markit manufacturing purchasing managers' index (PMI) fell to 49.5 in December, signalling contraction and weaker global demand conditions, from November's neutral reading of 50.0.

The US economy is recovering quite strongly, which should lend boost to Asia. "But why we haven't seen US growth coming through," said Mizuho economist Vishnu Varathan, "is because a lot of the US pick-up is due to shale and housing. Not many would have lifted Asian exporters."

He also cautioned that if falling oil prices tip America's shale producers into trouble, it could interfere with the country's growth momentum and hurt global demand.

For some time now, industrialists struggling with high land and manpower costs in Singapore have been "threatening" to relocate, where industrial Reits have also gone in search of higher yields. But analysts believe that many would still consider the whole equation - government incentives, port efficiency, Singapore's optimal location as a springboard into Asia - and stay.