http://www.theedgeproperty.com.sg/co...strial-segment

Odd figures in industrial segment

By Ku Swee Yong, Feily Sofian / Century 21, The Edge Property | November 6, 2015 4:00 PM MYT
Tags: industrialGDPPMImanufacturingVivoCitiesUbi Avenue 1
Economic figures for the industrial and manufacturing sectors released in the past few months have been poor. Year-on-year, Singapore’s total trade has been declining every month for the last 15 months, since July 2014.

In terms of GDP, the manufacturing sector shrank 2.6%, 4.9% and 6% year-on-year in the first, second and third quarters of 2015 consecutively (Note: The third quarter drop is based on the flash estimate released by the Ministry of Trade and Industry on Oct 14).

The forward outlook is also gloomy. The Singapore Purchasing Managers’ Index (PMI) points to a contraction in the manufacturing sector for four consecutive months from 49.7in July, 49.3 in August, 48.6 in September and48.9 in October. A PMI reading above 50 indicates that manufacturing activities are expanding and a reading below 50 signals a contraction.

The index, published by the Singapore Institute of Purchasing and Materials Management (SIPMM), shows a reading of below 50, that is, a contraction, in nine of the last 12 months. As the PMI measures new orders, new export orders, inventory levels and production output, it provides an indication of manufacturing activities in the coming months. We can therefore expect fewer Christmas cheers from the manufacturing sector this year.



How is the industrial property sector?

Against a backdrop of declining manufacturing activities, the stock of vacant industrial space continues to increase, reaching 43.5 million sq ft of net lettable area in 3Q2015, a level not seen since the prolonged economic downturn in 2003. If you would like to have a sense of how much vacant space that is, you can try to imagine 43˝ VivoCities.

A significant one-third of the vacant lettable area, or 14 million sq ft, lies in the category of “Multiple User Factory”, translating into a vacancy rate of 12.7%. This is the category in which many individual investors, handcuffed by the tough policies in the residential segment, have ploughed their monies into thousands of overpriced tiny industrial units since 2011. In other words, the vacant space in multiple user factories adds up to the equivalent of 14 VivoCities. That is a lot of space competing for small industrial tenants.

While macro indicators such as manufacturing GDP and manufacturing PMI look weak, data released by JTC for 3Q2015 showed a negligible 0.3% year-on-year decline in overall industrial property prices and a frictional drop of 1.6% year-on-year in industrial rentals. The increased vacant space and the weaker macro outlook have yet to translate into significant price discounts. As for rentals, perhaps landlords are willing to extend longer rent-free periods to maintain headline rents as high as possible. Somehow, official data seems to be unable to capture the price movements on the ground.

While the official data may run counter to our ground observations, what we do know is that the supply of new industrial space is increasing. We may expect 66.4 million sq ft of additional industrial space in the next three to four years, and almost half of that will be completed in 2016.

And interest rates are rising. So, many of the financially stretched landlords are going to get edgy. Coupled with a weaker global environment, it is a matter of time before official indices for transacted prices and rentals drop more significantly. In the meantime, optimistic landlords taking reference from official data will find it tough to secure tenants without discounting from the prices of one or two years ago.



Competitiveness of Singapore

http://www.theedgeproperty.com.sg/co...strial-segment